In the past firms have often entered joint ventures to gain entry to markets. Recently R&D joint ventures have become more popular as well. Kenichi Ohmae (1989)holds that joint ventures are very liable to the interests of the parties involved especially as it involves equity. Ohmae (1998) argues that as soon as equity comes into play many managers get bogged down with concerns over control and there is considerable pressure to generate return on investment fast.
Moreover he states that managers must overcome the popular misconception that total control means success. Successful joint ventures are usually those that do not have an equity- and contract-based mode of ownership. Ohmae (1989) cites ICL’s “Do” list for joint ventures where personal commitment and mutual trust is expected. If contracts need to be used to guide the relationship then something is wrong. ICL required joint marketing agreements with all joint ventures in order to recover development costs and get volume margin benefits.
The relationship between Yokogawa and Hewlett Packard illustrates that joint ventures can be very successful indeed. Hewlett Packard moved into the Japanese market with a 51-49 joint venture with Yokogawa Electric. After two decades of successful collaboration enough confidence had built up and Yokogawa gave Hewlett Packard another 24%. Both parties never got too concerned about the ownership structure because the overarching goal of serving customers better was mutual. HP now owns 75% of 750$ million company with a 6. 6% net profit after tax.
Fuji Xerox’s joint venture is generating annual sales of 3$ billion and has enough autonomy to get involved in new areas such as digital imaging. Moreover Fuji’s knowledge of the Japanese market helped to fend off Japanese competitors that had targeted the market for medium- to low end copiers. Japanese keiretsu have proven for decades that holding an equity stake of 3%-5% is enough to keep the partner’s interest and at the same time maintain sufficient levels of autonomy for innovation to occur which provides a valuable lesson for joint ventures. Limitations and costs:
In 2000 Global One a three way alliance between Deutsche Telekom, France Telecom, and Sprint was terminated after 6 loss making years, internal turmoil, public conflict, and repeated downgradings by financial analysts. Inkpen and Ross (2001) found that due to a number of reasons some alliances persist beyond their “useful life”. As alliances are difficult to form managers are often reluctant to walk away from them after months of lengthy negotiations. Peer pressure is another reason. Alliance performance is difficult to measure and it is difficult to spot failure before it is imminent.
In the wake of globalisation alliances got linked to values that are difficult to challenge. Some firms seem to believe that the partner will “fix” it when things go wrong. Ending an alliance can almost be as lengthy a procedure as entering one. Alliances are expensive and time consuming to negotiate especially international equity joint ventures. When an alliance is negotiated, there are various costs, such as legal, accounting, and consulting fees; travel expenses, interpreters if the alliance is international, and benchmarking of other alliances (Inkpen and Ross, 2001).
Moreover negotiations are often viewed more like investments for the future rather than incurred sunk or past costs. Once successful alliances in the industry have been benchmarked against the deterioration of one’s alliance will be viewed as negligible compared to the strategic loss of face if the alliance was abandoned. Alliances, tend to become closely attached to strategic objectives in a manner that more often than not obscures financial performance realities. Involvement of senior managers may lead to persistence as senior executives are very reluctant to terminate alliances they pushed.
In the Global One case managers of all three firms made public statements regarding the importance of the alliance on a regular basis thereby putting their personal credibility on the line. When Mac Donnell Douglass invested in a Chinese joint venture that turned out sour firm values became part of the decision and the alliance persisted for 15 years despite an appalling performance. Closing cost of alliances can be extremely high as well as Daimler Benz found out when it had to buy out ABBi?? s share of the Adtranz joint venture for 472$ (Inkpen and Ross, 2001).
Finally conflict over termination and dissolution will contribute to the likelihood of commitment to a losing course of action and an inability of the partners to agree on withdrawal from the alliance. Advanced Elastomer Systems: Making a joint venture work Advanced Elastomer Systems (AES) develops, manuctures, and markets thermoplastic elastomers which is an elastic plastic. Because it is a mixture of rubber and plastic, a TPE has some surprising characteristics. First, it provides physical properties similar to rubber compounds.
When you squeeze Santoprene rubber, it pushes back. This property makes it ideal for sealing applications such as the rubber liner in the cap of a food or beverage container. About 75 percent of all major appliances have Santoprene rubber built into their design. Furthermore Santoprene is used for all sorts of molding and is 100% reprocessable. Monsanto, however, did not have a strong raw material position in synthetic rubbers, one of the key ingredients. In the late 1980s, Exxon Chemical was investigating similar technology based on different synthetic rubbers.
In 1991, a 50/50 joint venture was formed between Exxon and Monsanto to create AES. The company flourished, growing at a double-digit rate. At its inception, AES was about a $100 million company and went to 250$ million today. Because the management styles of the parents didni?? t match the requirements the management of AES had to come up with their own plan. In order to create a culture for AES a profile of future managers was designed and ensured that existing ones would aspire to it. The strategy was a success with an over 150% increase in sales in five years and a large base of regular customers.
Sverdrup Corporation: Managing strategic alliances According to the president of Sverdrup the market is driving the utilization of alliances . clients today insist on doing business only with low-cost suppliers. Sverdrup tried to meet customers’ expectations and as a low-cost producer, they were continually searching for the best way to deliver a product, a facility, or a service. Success today requires some form of partnership or strategic alliance. For Sverdrup, almost all assignments over $50 million now involve alliances.
To deliver the value clients expect, it must team up with other superior performers. While AES is a formal, legal entity, Sverdrup uses a lot of informal joint ventures. The firm works through a memorandum of agreements, a handshake, or a letter of intent to pursue more limited opportunities. For example, the facilities company often forms alliances when serving school districts across the country. Sverdrup is a major provider of program management services to school districts serving kindergarten through the 12th grade.
In looking strategically at that market some years ago, we evaluated client’s demands. What they wanted was a program manager whose core competencies included a thorough understanding of the entire education system and how to really improve it with major programs, a basic knowledge of methods and approaches needed to economically build and rebuild the physical structures needed to promote better education of children, and an appreciation for the steps that needed to be taken by school districts to get the funding required for most of these projects.
Through alliances, Sverdrup was able to offer assistance in all these areas. Clients benefit from these alliances because they receive quality services at low cost, they have access to the best processes and the latest technology, and they are required to have only limited involvement in the project. Alliance members benefit from profitable growth, ease of market entry or expansion – whether geographically or by project types, the opportunity to preview potential merger and acquisition candidates, and reduced cyclical volatility.