The use of Joint Ventures as a strategic tool for multinational companies

Index of contents

1 Introduction
1.1 Aims
1.2 Limitations

2. Literature review of Strategic Alliances and Joint Ventures
2.1 Choosing a partner – The collaboration with a competitor
2.1.1 Principles for competitive collaboration
2.1.2 Durability of the cooperation
2.1.3 Outcome when collaborating with a competitor
2.2 Strategic Alliances
2.2.1 SAs as a strategy for multinational businesses
2.2.2 Benefits of Strategic Alliances
2.2.3 Costs and risks when forming a Strategic Alliance
2.2.4 The need for a new management style
2.2.5 Range of Strategic Alliances
2.2.6 The role of Joint Ventures
2.3 Structuring the Joint Venture for a multinational strategy
2.3.1 The Joint Venture in a multinational perspective
2.3.2 A definition of Joint Ventures
2.3.3 The process of structuring a Joint Ventures
2.3.4 The Joint Venture checklist
2.3.5 Principles and reasons for Joint Venture creation
2.3.6 Risks and costs of Joint Ventures
2.4 Concluding JVs

3 Methodology
3.1 Research methods
3.2 Secondary Data
3.3 Primary Data
3.3.1 Analysis of a case study
3.3.2 Analysis of derived findings

4 Evaluation of a case study and derived findings
4.1 Eli Lilly-Ranbaxy Private Limited (ELR)
4.1.1 Eli Lilly and Company
4.1.2 Ranbaxy Laboratories Ltd
4.1.3 Joint Venture formation
4.1.4 Upcoming challenges for the Joint Venture
4.1.5 Reasons for building the Eli Lilly-Ranbaxy Private Limited
4.1.6 Occurring risks during the Joint Venture arrangement
4.1.7 Outcome for Eli Lilly Company
4.1.8 Outcome for Ranbaxy Laboratories Ltd
4.1.9 Concluding the ELR Joint Venture
4.1.10 The ELR JV as a role model
4.2 Eli Lilly’s framework for structuring alliance formation
4.2.1 An overview of Eli Lilly’s partnership approach
4.2.2 Corporate Business Development at Eli Lilly (Get it)
4.2.3 Office of Alliance Management at Eli Lilly (Create Value)
4.2.4 Putting principles into practice
4.2.5 Concluding Lilly’s Alliance Management approach

5 Conclusion

6 Recommendations

7 References

8 Bibliography

9 Appendix

List of figures

Figure 2.1.1.1 The Evolution of Joint Ventures, own figure (2008)

Figure 2.1.2.1 Factors influencing the durability of the collaboration, own figure (2008) according to Hamel (2008)

Figure 2.2.2.1: Benefits of creating strategic alliances, own figure (2008)

Figure 2.2.3.1: Costs and risks of strategic alliances, own figure (2008)

Figure 2.2.4.1: Comparison of traditional management styles versus new styles for successful strategic alliances, Vyas et al. (1995)

Figure 2.2.5.1: Differentiation-approaches of strategic alliances, own figure (2008)

Figure 2.2.6.1: Range of strategic alliances, Bartlett et al. (2008), p. 561

Figure 2.3.1.1: Classification of the Equity Join Venture, own figure (2008)

Figure 2.3.3.1: Process of structuring the Joint Venture, own figure (2008), according to Bartels and Pass (2000)

Figure 2.3.4.1: Joint Venture Checklist, Beamish (2008), p. 633

Figure 2.3.5.1: Principles and reasons for creating a Joint Venture, own figure (2008)

Figure 2.3.6.1: Risks and costs of Joint Ventures, own figure (2008)

Figure 4.1.8.1: Ranbaxy's sales and exports (1997 - 2007), own graph (2008) according to www.ranbaxy.com (28/03/08)

Figure 4.2.1.1: Eli Lilly's process for creating new partnerships, Eli Lilly and Company Alliance Management (2007)

Figure 4.2.2.1: A tool to define primary dimensions of good partnering, Eli Lilly and Company (01/11/05)

Figure 4.2.4.1: Voice of the Alliance model to measure the health of the alliance, Futrell et al. (2005)

1 Introduction

In a time of changing demand behaviour and the contraction of product life cycles the concentration on smaller market segments and individual core competencies seems to be inevitable for every company. The range of business activities is decreasing within each company, whereas the need for coordination is increasing on a high scale. As the resource of knowledge is getting more important, companies are searching for more flexible and efficient forms of organisation (Bartlett et al. 2008, Brämer 2007).

The historical view of companies to protect potential profits by using competition or bargaining has changed towards a collaborative relationship with other externals, such as competitors, customers, suppliers and many other institutions (Bartlett, 2008, Donaldson 2007). Out of the fact that inter-firm cooperations are increasingly based on the collaboration of competing firms emerges the need for clarifying the motives for doing so.

Since the 1970s, Strategic Alliances (SAs) are to be seen as a new way of co­ordinating activities to combat the economical challenges without sacrificing autonomy (Besanko 2007). “A strategic alliance is an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership” (Wheelen and Hungar, 2000, p.125). “These alliances range from informal “handshake” agreements to formal agreements with lengthy contracts in which the parties may also exchange equity, or contribute capital to form a joint venture corporation” (Elmuti and Kathawala, 2001, p.205). Sharma further evaluates that SAs are “interfirm co-operative arrangements, involving flows and linkages that utilise resources and governance structures from independent organizations, for the joint accomplishment of individual goals linked to the corporate mission of each participating firm” (1998, p. 511).

Authors in the field of SAs are of different opinions about the range of SAs. The dissertation is focused on Joint Ventures (JVs) and the question whether a JV can be embraced by the term of SA or not.

1.1 Aims

The major aim of the dissertation is the elaboration of a detailed literature review concentrating on JVs as a strategic tool for multinational companies. Furthermore, it will be essential to analyse and evaluate the different forms of appearance of SAs and to clarify the coverage of the term, especially concentrating on JVs. After that it will be helpful to identify the main incentives why companies use JVs and to outline the drawbacks as well. An evaluation of the process of forming a JV will identify important pre-arrangements. The Eli-Lilly Ranbaxy JV will be evaluated on the basis of the above mentioned findings. An analysis of the performance of this JV and derived findings concerning the alliance management are discussed as well. The following key questions will be answered during the elaboration:

- What are the incentives of collaborating with a competitor?
- Why do firms increasingly engage in strategic alliances?
- Which forms of alliances do exist and is the Joint Venture one form of a strategic alliance?
- What are the outcomes and implications of setting up a Joint Venture?
- How is the theory of Joint Ventures used in practice in order to maximise resulting benefits and to avoid drawbacks?
- Has Eli Lilly and Company established generalised models that are useful to structure the process of alliance management?

Hence, it will be essential to analyse the deciding theory of JVs. Furthermore, derivable indications of how the theory has been put into practice will be critically assessed.

1.2 Limitations

The dissertation embraces a literature review and the evaluation of a case study including derived findings.

The available literature on SAs and JVs was adequate enough to establish a detailed review. Some data concerning the failure rates of SAs was accessible. However, no reviews or studies covering the measured costs and risks or benefits of alliances could be found.

A major problem in the attempt to collect primary data was that the analysed companies were not willing to provide first hand data.

Hence, the linkage between the case study and derived findings is limited to announcements from Eli Lilly’s CEO Sydney Taurel. Unfortunately, Eli Lilly and Company did not respond to several enquiries so that the concluded linkage is based on this material. The analysis itself is based on publications, such as journal articles, power point presentations, announcements and websites from Eli Lilly Company as well as other publishers. In this case, Eli Lilly was not willing to provide first hand data for any kind of analysis.

A combination of accessible primary data with secondary data to support secondary data’s illustration was difficult to achieve. It was attempted to balance these resources to give an adequate picture of Lilly’s development in terms of alliance management.

Concluding the most significant elements a recommendation was derived, which addresses multinational companies, trying to enlarge their alliance management and accompanying collaborations.

2 Literature review of Strategic Alliances and Joint Ventures

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Figure 2.1.1.1 The Evolution of Joint Ventures, own figure (2008)

The figure above represents a summary of the evaluation of JVs drawn from the available literature. Arising pressure from the external environment has increased the necessity for multinational businesses to implement strategic amendments. Whereas in the past cooperation between competitors was not conceivable, changing circumstances resulted in an accelerated trend towards sharing information with competitors (Grant 2008). The reality of today’s business nature constitutes an ongoing contradiction. On the one hand, firms have to keep competitive advantage towards competitors. On the other hand they have to share important information and resources with other companies to enhance their competitive advantage.

The establishment of SAs has accelerated due to the changing circumstances in the business environment. Nowadays, they are seen as a strategic tool for collaborating with a competitor and for doing overseas business. The adequate use of specific forms of SAs depends on individual circumstances that influence the participating companies and their unique needs and objectives.

2.1 Choosing a partner – The collaboration with a competitor

As Hamel et al. (2008) point out, cooperation is becoming an increasingly considered low-cost route to gain access to new technology and further markets. The objective of this is to build a competitive advantage against outsiders of the alliance. Collaboration is used to compensate the pressure of time, the increasing need for product development and the penetration of new markets (Johnson 2007, Ernst 2002). While doing so, each partner is trying to prevent a diversified transfer of key resources, capabilities and competencies.

In general, competitive collaboration means that the partners try to “enhance their internal skills and technologies while they guard against transferring competitive advantages to ambitious partners” (Hamel et al. 2008, p. 641). Thus, each partner is trying to enhance its competitive strength by collaborating on a strategy, where companies co-operate in order to learn from each other instead of entering a new market alone (Contractor and Lorange 1988). However, it has to be highlighted that the existing risk of key information leakage is inevitable (Bartlett et al. 2008). The companies have turned away from traditional market transactions where only a limited amount of information is shared. The conditions to form a cooperation with a competitor often requires that a considerable amount of meaningful information is passed on (Besanko 2007).

2.1.1 Principles for competitive collaboration

Companies that want to enhance their competitive position always have to keep in mind that collaboration is competition in a different form (Bartlett et al. 2008). By maintaining their strategic aims, the co-operating companies have always to be aware of their partner, who is still a competitor. Because the cooperation is evolving over time, companies have to take care which information is crossing the borders at all time. This fact will be further analysed in section 2.2.3 when the so called ‘gatekeepers’ are involved to control the mutual information flows. Hence, one of the most important principles of collaborating with a competitor is to learn about his capabilities and useful measurements.

Having evaluated the increasing necessity for co-operating with a competitor it is useful to analyse its advisable durability and the conditions under which such collaborations can be long lasting.

2.1.2 Durability of the cooperation

Referring to Hamel et al. (2008) three main conditions determine the possibility of reaching mutual gain, which give reason for a sustaining collaboration. These interdependent conditions can be seen in figure 2.1.2.1 below.

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Figure 2.1.2.1 Factors influencing the durability of the collaboration, own figure (2008) according to Hamel (2008)

First of all, it is necessary that both partners have compatible strategic goals while their competitive goals predicate on a different basis. Partners that are working in the same industry sector might have different target groups so that their competitive strategy is diverging. According to Hamel et al. (2008) and Johnson et al. (2007) this is essential and inevitable for sustaining mutual gain. However, Sharma (1998) criticises this perception by pointing out that “success in SAs is more achieved by interacting with the alliance partner than by the initial strategic compatibility between the alliance partners” (p. 524). According to this account, the interaction and the ability of adapting important knowledge is a more likely key to mutual gain.

The second main prerequisite to sustain in the competitive alliance is that both partners only have little market power compared to the industry leaders and that the size of each partner is modest. Both companies should strive to expand their business operations by using some form of collaboration (Bartlett et al. 2008).

As long as each partner believes to benefit from its counterpart and ensures the security of key-capabilities by sustaining its individual competitive advantage, the alliance is profitable. This third condition completes the area of preconditions according to Hamel et al. (2008) and assures that the collaboration still remains valuable.

However, Bleeke and Ernst (1993) advise further criteria for successful and long lasting collaborations. They mention that the partners have to bring in personal commitment particularly, for instance in form of management time or key personnel. To gain mutual benefits it is essential to offer respect and trust towards each other and to recognise and secure mutual expectations.

2.1.3 Outcome when collaborating with a competitor

The collaboration with a competitor can be used as a potential key for additional benefits. For multinational companies seeking towards competitive advantage vis-à-vis other companies it provides the opportunity for gaining access to new markets, resources and capabilities and to share costs throughout the cooperation. However, the collaboration is also accompanied by certain risks and costs, which can counterbalance achieved benefits (Contractor and Lorange 1988).

Although it has been stated that partners have to limit the transparency of their key-knowledge, competitive collaboration can offer a significant advantage (Bartlett et al. 2008). The proximity towards the partner offers the possibility of a better benchmark, not only considering certain manufacturing capabilities for instance. As a company is getting close enough to its rival, it can learn how the partner reacts towards price changes, how executives are measured and rewarded, and how the company prepares itself in order to launch a new product. According to Hamel et al. “collaboration can increase the chances of success in future head-to-head battles” (2008, p. 647). Thus, the most obvious potential partners are those ones that operate in the same industry (“head-to-head competitors”) (Bartels 2000, p.136).

It is inevitable to find an adequate balance between opening the own company to outsiders on the one hand and to control over the permanent competitive advantage on the other hand (Buckley and Pervez 1999). Possible drawbacks are the potential decrease of revenues due to a limited freedom of decision making and increasing costs, caused by enlarged negotiations and additional transaction costs (Contractor and Lorange 1988). Companies might assume that enormous investments are inevitable, which increases the collaborative costs as well (MacCormack and Forbath 2008).

The apparently paradox of achieving competitive advantage by collaborating with a competitor demands a strategic tool for balancing these aspects. SAs can be seen as such a tool and will be analysed in the following section.

2.2 Strategic Alliances

Especially since the 1970s the trend of forming international SAs has increased enormously. Nowadays, the top 500 global companies have an average of 60 alliances each, basically to combat the speed of market change, to find new strategic capabilities and to meet customers and stakeholders expectations (Johnson et al. 2007, Dyer et al. 2001, Ernst 2002, Gonzales 2001).

Opportunistic alliances, franchising, licensing and subcontracting are all different forms of SAs where two or more companies agree to cooperate and perhaps to share resources (Bartlett et al. 2008). These resources cover tangible assets and explicit knowledge as well as intangible capabilities, such as tacit knowledge, specialised skills or features of a company (Sharma 1998, Bartlett et al. 2008). SAs differ in the range of shared commitment, equity involvement and include a special agreement between the co-operating companies. Many authors have tried to clarify the term SA by classifying it in the field of international business activity or breaking it down into its components.

2.2.1 SAs as a strategy for multinational businesses

Bartels and Pass (2000) determine three strategies to carry out overseas business: Exporting and importing seems to be an obvious way of participating in international business. Another possibility is foreign direct investment (FDI) and the third concept is expressed by building up a SA with foreign partners. According to Bartels and Pass, SAs can be seen as the opportunity to arrange an involvement in overseas business on a long term basis, rather than solo exporting and FDI.

2.2.2 Benefits of Strategic Alliances

To give a general overview of resulting advantages, the benefits of SAs will be briefly covered at this stage. The various benefits mentioned in the published literature are summarised in figure 2.2.2.1 below.

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Figure 2.2.2.1: Benefits of creating strategic alliances, own figure (2008)

According to Bartlett et al. (2008) a major reason for creating an alliance can be seen in the opportunity of technology exchange. Particularly shorter product life cycles have urged companies to collaborate on R&D projects (Bartlett et al. 2008, Johnson et al. 2007). To share the costs which might be beyond the scope of one organisation, companies collaborate in order to stay competitive. Moreover, the interdisciplinary approach has gained significant importance. Different forms of industry sectors are beginning to collaborate on certain R&D-projects, for instance biotechnology and IT-technology (Knoke and Todeva 2005).

An increase in global competition has led to coalitions, which focus on the objective of fighting a common ‘enemy’ (Bartlett et al. 2008). The Airbus consortium for instance was originally set up by competing aircraft manufacturers in order to form one single, powerful European counterpart to Boeing. Furthermore, the customisation of global products increased the importance of local partners that are in the possession of specific local market knowledge. Economies of scale can be seen as one of the most fundamental reasons to set up SAs. The pooling of resources to increase economies of scale and the leverage of competencies is a traditional objective for entering new markets by avoiding possible entry barriers (Vyas 1995).

2.2.3 Costs and risks when forming a Strategic Alliance

About 70% of all SAs fail to a certain extend (Gonzales 2001). Hence, companies also have to be aware of costs and risks that can occur when forming a SA. The main costs and risks are summarised in figure 2.2.3.1 below. illustration not visible in this excerpt

Figure 2.2.3.1: Costs and risks of strategic alliances, own figure (2008)

Increased organisational complexity increases the costs of collaboration, which can be due to some differences in administrative heritages (Bartlett et al. 2008). Moreover, more strategic and broader ranges of alliances and the need to build in greater environmental sensitivity increase the costs of collaboratio. Vyas et al. (1995) and Gonzales (2001) further mention that the failure to learn about and understand cultural differences and a lack of commitment can weaken the collaboration. Diverging cultural fundamentals are rooted on diverging believes, assumptions and espoused values and are the persuasion of different nationalities (Schein 1992). Costs can occur due to a lack of understanding and long lasting negotiations instead of finding a consensus.

A risk can be determined by the appropriation of competencies through learning from a partner. For both parties it will be necessary to fully exploit the learning potential of the alliance. However, each partner has to think about preventing too much knowledge from being made available (Bartlett et al. 2008). The key role in this case is adopted by the so called “gatekeepers”. These gatekeepers control the free flow of knowledge across the organisation and prevent the disclosure of unintended information at the same time. For instance Fujitsu’s many partners all have to go through a single office (the “collaboration section”) to request information and assistance from different divisions (Hamel et al. 2008). Problems can occur, if knowledge is shared on different business levels. If for example certain information is hold back by a division the partner company might try to get this information through another division, thereby bypassing this intended limitation. Referring to Knoke and Todeva (2005) “even the most meticulous contractual safeguards provide no guarantees against uncertainties, ambiguities, and disputes that constantly surface during daily operations” (p. 134).

Moreover, there is a certain threat that one partner undermines his competitive position within the SA (Bartlett et al. 2008). This can happen if one firm relies too much on other partners, which prevents the impulse of independent learning.

2.2.4 The need for a new management style

Collaborating with a competitor in an SA generates eminent changing circumstances compared to doing business on ones own. Hence, the failure to recognise and implement a new management style can be rigorous. An abstract of the most important changes in the management style are listed below.

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Figure 2.2.4.1: Comparison of traditional management styles versus new styles for successful strategic alliances, Vyas et al. (1995)

As far as the new management style is concerned, companies have to find individual solutions to combat the risks that go along with setting up a SA. The new management style clearly expresses the trend towards competitive collaboration but differs in it’s extend, depending on the type of SA to be implemented.

Furthermore, companies have to find individual solutions to measure their effectiveness in collaborative performance (Vyas et al. 1995). Tools and instruments to evaluate the company’s achievements and necessary amendments are significant for its future success (Doz and Hamel 1998).

2.2.5 Range of Strategic Alliances

Since a variety of analyses on SAs are carried out, different methods of classifying these alliances are published and summarised below.

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Figure 2.2.5.1: Differentiation-approaches of strategic alliances, own figure (2008)

Bartlett et al. (2008) identify two major trends when talking about SAs. First the classical SA which indicates cooperation between a multinational company (MNC) located in an industrialised country (senior partner) and a junior local partner based in a less industrialised country. However, more and more alliances between firms in industrialised countries are formed increasingly. Whereas classical SAs are set up to profit from low-cost production factors or to gain knowledge about a certain market, alliances between companies based in industrialised countries are formed to develop new products and technologies.

Besanko (2007) explains that a differentiation of SAs can be made by subdividing them into horizontal, vertical or other ones. Horizontal alliances express a cooperation of firms in the same industry sector. Vertical alliances are based on a cooperation between companies in the vertical chain. Other forms of cooperation are neither industry-related nor related in the vertical chain (for instance a JV between McDonald’s and Toys “R” Us in Japan, where McDonald’s restaurants are integrated into Toys “R” Us stores) (Sterngold, 1992). Besanko (2007) further evaluates that SAs are positioned between arm’s length market transactions and a full vertical integration. In such an alliance each partner remains independent, which is a typical criterion of arm’s length market transactions. Nevertheless, a high degree of cooperation and the willingness to share important information create a certain synergy potential among the partners.

According to Sharma (1998) there is another essential criterion for explaining the multiple forms of SAs. He expresses two schools of thoughts. The first one is described as a transaction cost approach and the second one is orientated towards achieving individual objectives by shared commitment. When companies build collaborations and decide to share information and knowledge, each of them will expect a certain outcome. The transaction cost approach highlights the idea of sharing costs with each other, for instance by achieving a larger bargaining power over suppliers and thus realising lower input costs. Sharma (1998) criticises this approach by pointing out that shared costs do not cover the whole motivation for contracting an alliance. He explains, “this approach fails to capture some important aspects of SAs, such as creating legitimacy, learning and a rapid market entry” (p.512). Therefore accomplishing the individual objectives of each company should be prior for every SA.

Having identified the importance of the co-operative approach by using a SA, it is useful to concentrate on one form of appearance of SAs to ensure a detailed analysis.

2.2.6 The role of Joint Ventures

In the field of JVs the classification of Sharma’s (1998) two approaches can be underlined by Inkpen (1995), who identifies two major benefits. The first field of benefiting focuses on economies of scale, pooling resources and the access to various technologies in order to save costs. Moreover, Inkpen (1995) identifies the potential benefit of learning through collaboration. He explains that “the differences in partner-skill are the fuel for learning” and accentuates the importance of internalising key skills, knowledge and capabilities (p. 3). Bartels and Pass (2000) further support this idea by separating the terms “knowledge sharing arrangement” (e.g. licensing, franchising) and “cooperation arrangements” (e.g. Joint Venture) from each other (p. 64). Companies which have formed a cooperation arrangement share information and offer a high level of commitment towards a commonly owned venture. By breaking down the term of SA, Bartlett et al. (2008) identify the role of JVs depending on the level of interaction and the type of arrangement.

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Figure 2.2.6.1: Range of strategic alliances, Bartlett et al. (2008), p. 561

Referring to Bartlett et al. (2008) and Bartels (2000) the JV is a certain form of a SA, usually requiring the greatest level of interdependency, cooperation and investment. However, it has to be seen critically if JVs really are a component of SAs. As most SAs do not cover any equity involvement, JVs are different since they might include immense equity involvement (Equity Joint Venture). Thus, the organisational framework of a JV is not comparable to other forms of SAs.

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