motivations behind strategic aliiances and joint ventures across different phases of the industry...
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A Comparative Study of the Motivations behind SAs and JVs across different phases of the Industry Lifecycle
Drivers and Motives for SAs and JVs
Acquisition of technology and joint R&D for major innovations and market advantage
Assembling of complementary resources to achieve or improve global competitiveness
Industry convergence requiring interdisciplinary skills and inter-industry cooperation
Risk reduction when development costs are very high and results are uncertain
Access to markets when governments’ policies demand alliance with a domestic firm
Co-opting competitors or teaming up against a particular competitor
Domestic Partner Foreign Investor
Acquisition of technology
Market expansion and added profits
Introduction of new products
Access to raw materials
Increased productivity
Decrease exposure and risk
New management techniques
Easier contacts with government
Access to new markets
Smoother relations with workforce
Training of personnel
Use local managerial and professional talent
Strategic Alliances Joint Ventures: Partners’ Expectations
The Stages of the Industry Lifecycle
Product Innovation vs. Process Innovation
Characteristics of Different Phases
The Introduction Phase
Introduction
In the introduction stage of the life cycle, an industry is in its infancy
New, unique product offering has been developed & patented, thus beginning a new industry
It may be a small entrepreneurial company or a proven company which used research and development funds and expertise to develop something new
Marketing refers to new product offerings in a new industry as "question marks" because the success of the product and the life of the industry is unproven and unknown
Few competitors No threat from substitutes because the
industry is so new The power of buyers is low because those
who require the product are prepared to pay to get hold of supplies that are limited.
Suppliers exert some power, because volumes purchased are still low and the industry is relatively unimportant for suppliers.
What are its Characteristics ?When is an industry in introduction stage ?
What are the motivations for firms to enter into a Strategic Alliance?
Strategic necessities: In highly competitive and emergent industries, new ventures consider strategic alliances either to pioneer innovative technologies, or to move away from a vulnerable position
Internal resources: The intellectual capital of a new venture represents an important determinant of alliance formation, since the possession of valuable resources is a necessary condition for the attraction of suitable partners
Social opportunities: The social connections of the founding team, along with endorsement by reputable organizations – such as venture capitalists – facilitate start-ups’ involvement in strategic alliances
In a way, alliance making presents an inherent paradox for new ventures, since strategic alliances are set up to access external resources, yet internal resources are needed to set up strategic alliances.
Sources: http://www.inc.com/encyclopedia/industry-life-cycle.html Comi, A and Eppler, M. J. (2009) ‘Building and Managing Strategic Alliances in Technology-Driven Start-Ups: A Critical Review of Literature’
Introduction
Exploitative Commercial Alliance Start-ups may enter into exploitative commercial alliances with the purpose of accessing the resources
necessary to introduce technological innovations to the final market An exploitative propensity generally leads to the constitution of strategic alliances with downstream partners,
such as large companies excelling at product commercialization.Explorative Technological Alliances Explorative technological alliances enable new ventures to advance innovation, either by pooling together
complementary resources or internalizing the partner’s knowledge. An explorative propensity usually leads to the formation of strategic alliances with horizontal partners in a
similar positioning along the industry value-chain, or with upstream partners such as universities and government labs
What are the types of strategic alliances?
What are the challenges for firms to enter into Strategic Alliance?
In comparison to large companies, start-ups usually possess fewer technological resources to barter with potential partners, and cannot engage in collaborative agreements at multiple stages of the value chain.
Besides, the limited social capital of new ventures is likely to restrain the attraction of valuable partners, and the lack of prior work-related ties may further limit the opportunities for collaborative engagement.
The small size of management functions in new ventures also bears a negative influence on partnership formation, since small functions usually have less extensive connections with potential partner organizations. When the management function is small, top executives are also pressed with short-term operating matters, thus lacking the time to bring about collaborative relationships.
Source: Comi, A and Eppler, M. J. (2009) ‘Building and Managing Strategic Alliances in Technology-Driven Start-Ups: A Critical Review of Literature’
Industry: Microprocessor
The year was 1979. Atari introduced a coin-operated version of Asteroids. 3COM, Oracle, and Seagate were founded. The Motorola 68K and Intel 8088 were released. Hermann Hauser and Chris Curry, with the support of a group of students and researchers from Cambridge
University’s many laboratories, set up Acorn Computers to make personal computers in Cambridge, England.
History
Source: Levy, M., ‘The History of The ARM Architecture: From Inception to IPO’
JV
•1985: Acorn Computer Group developed the world's first commercial RISC processor
•1987: Acorn's ARM processor debuts as the first RISC processor for low-cost PCs
•1987: Apple entered the PDA market and had produced the first Newton, based on the AT&T low power processor called ‘Hobbit.
•John Stockton, Research Fellow of VLSI Technology infected the design team with a passion for ARM
Formation of Joint Venture (JV)
1990: Advanced RISC Machines (ARM) spins out of Acorn and Apple Computer's collaboration efforts with a charter to create a new microprocessor standard. VLSI Technology becomes an investor and the first licensee
IP Licensing Model
Strategic Alliance: ARM
ARM Holdings plc is the world's leading semiconductor intellectual property (IP) supplier.
Designs are used in more than 95% of the world's mobile phones.
Current Scenario
Drivers for the Alliance
Resources to design the
processor Apple needed in form of cash infusion
VLSI Technology becomes an
investor and the first licensee
Required a processor that
can handle Newton’s OS
Source: http://www.cpushack.com/2010/10/26/how-the-newton-and-arm-saved-apple-from-death/ http://www.arm.com
Current Alliances
Share Price: ARM Holdings plc (LON:ARM)
Industry: Fuel-Cell Vehicles
French-Japanese-German partnership began in April 2010, with three “pillar projects” primarily focused on Europe
In January 2013, Daimler AG, Ford Motor Company and Nissan Motor Co., Ltd., have signed a unique three-way agreement for the joint development of common fuel cell system to speed up availability of zero-emission technology and significantly reduce investment costs.
Strategic Alliance
The partnerships come after the failure of electric cars to meet sales expectations, despite heavy subsidies worldwide
Although hybrids have gained ground, more is needed to meet the new emissions targets The research has shown that the FCV will emit less than half as much carbon dioxide as conventional
gasoline-powered vehicles do now They would also release less carbon dioxide than electric vehicles when electric vehicles are charged in parts
of the U.S. that rely heavily on coal power High development cost Long Time-to-market
Roadblocks in Development
Source: http://www.reuters.com/article/2013/07/02/us-autos-fuelcell-hydrogen-idUSBRE9610JO20130702 http://www.greencarcongress.com/2013/09/20130912-daimlernissan.html
Strategic Alliance: Daimler, Ford & Renault
Collaboration expected to lead to launch of world’s first affordable, mass-market fuel cell electric vehicles as early as 2017
Unique collaboration across three continents and three companies will help define global specifications and component standards
Sends clear signal to suppliers, policymakers and the industry to encourage the further development of hydrogen infrastructure worldwide
The goal of the collaboration is to jointly develop a common fuel cell electric vehicle system while reducing investment costs associated with the engineering of the technology
Each company will invest equally towards the project The strategy to maximize design commonality, leverage volume and derive efficiencies through
economies of scale will help to launch the world’s first affordable, mass-market FCEVs as early as 2017 The partners plan to develop a common fuel cell stack and fuel cell system that can be used by each
company in the launch of highly differentiated, separately branded FCEVs, which produce no CO2 emissions while driving
Characteristics of Collaboration
Toyota says it will unveil a hydrogen fuel-cell-powered sedan later this year that will go on sale in 2015 On July 2,2013, GM and Honda have announced partnerships to commercialize the technology The prototypes that GM and Toyota built a few years ago cost well over $1 million each. Now Toyota says its
goal is to sell its fuel-cell sedan for less than $100,000
Recent Developments
Source: http://www.daimler.com/dccom/0-5-7171-1-1569731-1-0-0-0-0-0-12037-0-0-0-0-0-0-0-0.html http://www.reuters.com/article/2013/07/02/us-autos-fuelcell-hydrogen-idUSBRE9610JO2013070 http://www.technologyreview.com/news/516711/why-toyota-and-gm-are-pushing-fuel-cell-cars-to-market/
Identification of Similarities and Differences within the Introduction Phase
Similarities
The technology was in nascent stage for
both industries
Alliances and JVs to create innovative
product for existing markets
Alliance and JVs to reduce the time to
develop and market newer technology
Microprocessor:
Exploitative alliance to create new
microprocessor technology
Fuel-Cell Vehicles:
Explorative alliance to
pool together complementary resources
Microprocessor: Alliance
with downstream
partner excelling at
commercialization of product
Fuel-Cell Vehicles:
Alliance with horizontal partners in
similar positioning along value
chain
Differences
The Growth Phase
Introduction
A sector of the economy experiencing a higher-than-average growth rate
Companies across such industries exhibit solid earnings and revenue figures
Referred to as ‘Sunrise’ industry
Increased costs on research and development
Market acceptance Increased ROI Declining costs of production Stiff competition
Characteristics
Telecom Biotechnology Solar Power Retail Pharmaceuticals E-Commerce Mining Healthcare Infrastructure
Common Examples of Industries in Growth
When is an industry in growth?
Various Possible Strategies
Capture Market Share Beat the competition Product Differentiation Innovation Value-Creation Segment Expansion Brand Expansion
Industry: Telecom
Govt. policies and TRAI have provided a conducive environment for Telecom operators.
Sector has become more competitive while enhancing the accessibility of Telecom services.
Increasing network coverage and lowering tariffs have increased the subscriber growth.
Internet subscribers have increased to 164 million Mobile internet subscribers stand at 143 million
The Industry in Growth
Second Largest Telecom Network after China The no. of Telephone users touched 897 million Total Market Size: USD 64 Billion
Urban M/Share: 61% Rural M/Share: 39%
Industry Characteristics
Increasing Subscriber base Mobile Value-Added Services Mobile Number portability Newer Telecom Technologies like 3G,4G Decreasing cost of Smartphones
Demand Drivers
Industry Trends
Prudent Regulatory policies National Telecom Policy 2012 proposes unified
licensing, full MNP and free roaming Telecom penetration is expected to increase to
70% from the current 41%. The Green Telecom initiative aims at reducing the
carbon footprint for Telecom industry and TRAI is in consultation since 2010.
Major Alliances
Indus Towers NTT DOCOMO and Tata Teleservices Ltd. Telenor and Unitech
01020304050 40.4
26.818.1
CAGR(%)
CAGR
Joint Venture: Indus Towers
Indus Towers Ltd. is a joint venture of Airtel, Vodafone and Idea incorporated in Nov, 2007.
Provides Shared Telecom infrastructure to Telecom Operators.
Operates in 15 circles out of the total 22 telecom circles.
The Joint Venture Drivers for the JV
Of every 5 calls made in India 3 are made through an Indus site.
Cost savings of $3 Billion have been recognized due to sharing of telecom infrastructure
Numerous awards & recognition like the Greentech Safety Award
The Current Scenario
Additional TowersNetwork Capacity & Coverage
Streamline OperationsSharing of Operating Costs
Tower ConsolidationLower Cost per Tower
Entry into segments like TV & Radio
Telecom Companies can focus more on core-customer facing business
Market Share
Opex Savings
Economies of Scale
Economies of Scope
Strategic Focus
Industry: Indian Pharmaceuticals
Globally, pharma companies are facing pressure from governments and taxpayers alike for reducing prices of drugs and initiating outcome-based pricing
Global firms impacted by decline in R&D productivity, increasing drug discovery costs, patent cliff
Emerging Indian market offers ray of hope due to:- Large domestic market Product Development Skills Scientific Talent
The Industry in Growth
Period under Consideration: 2002 - 2012 Indian Pharma industry globally 3rd largest in terms
of volume and 13th largest in terms of value Total Market Size: 1233 billion
Domestic Consumption: 600 billion (48.6%) Exports:633 billion (51.4%)
Industry Characteristics
2002-07 2007-12 2012-170
5
10
15
20
13 12.515.1
CAGR (%) Linear (CAGR (%))
Growing and Ageing Global Population Growing Sick Population Rising incidence of non-communicable diseases Improve access to Healthcare Higher Affordability
Demand Drivers
Industry Trends
One of the main ways MNCs enter the Indian market is through acquisitions
However, given the scarcity of assets, valuations in the sector have increased manifold
Companies are now exploring other ways of collaboration through alliances and partnerships
Partner Selection: needs more thorough operational due diligence
Major Alliances
Bayer-Zydus Cadilla Lilly-Lupin Novartis-USV
Strategic Alliance: Merck-Sun Pharma
Entry into the high growth emerging market for Merck and developed market for Sun
Proven low cost manufacturing capabilities of Sun Pharma
Sun Pharma Advanced Research Company Ltd (SPARC) proprietary platform technology
Merck had proven expertise in broad geographic commercial footprint
Merck well-versed withClinical Trials Regulatory ApprovalsSun could focus on core product development activities
Cost Savings
Strategic Focus
Innovative Product
Development
Market Access
Marketing Expertise
Sun Pharma crossed the coveted two-billion dollar mark in revenues in March 2013
Sun Pharma crossed 1 lakh crore ₹mark (around US $ 16 billion) in market capitalization in 2013
Alliance forged in 2011 To develop, manufacture and commercialize new
combinations and formulations of innovative, branded generics in the Emerging Markets
Drivers for the AllianceThe Alliance
The Current Scenario
Industry: Indian Construction
Growing contribution to gross domestic product (GDP)—from 5.1 % in 2001–02 to 7.9 % in 2010–11
Globally the construction market is expected to grow at 5.1 % and 4.7 % during 2010–15 and 2015–20
In India it is expected to grow at 9.9 % and 7.6 % By 2020, India is expected to emerge as the world’s
third-largest construction market
The Industry in Growth
Period under Consideration: 2005-2013 Highly fragmented industry Total Market Size: 248,000 crore
Industry Characteristics
2005-10 2010-15 2015-200
246
81012
99.9
7.6
CAGR (%) Linear (CAGR (%))
Growth in nuclear families Rapid Urbanization Government support for affordable housing
schemes
Demand Drivers
Industry Trends
Few restrictions on foreign direct investment (FDI) for infrastructure projects
Tax holidays for developers of most types of infrastructure projects, some of which are of limited duration
Opening up of the infrastructure sector for Public Private Partnerships (PPPs)
Joint Venture: Sahara-Turner Construction
Estimated that $ 500 billion – $ 1 trillion will be spent on total infrastructure in India In next 10 years
Sahara – Land, Local Market Knowledge, Asset Base of $25.94 billionTurner – Technology, 110 years of experience
Share Uncertainty/UnpredictabilityShare Operational RisksShare Technology Development Risks
Sharing of operating costs which are traditionally high in construction sector
Long Term Competitive Positioning
Scalability
Sahara Turner Construction Limited formed in 2012 Plan to undertake $25 billion worth projects of Sahara
Prime City over the next two decades
The Joint VentureDrivers for the JV
8 projects in progress Development and construction planned
for 21 cities
The Current Scenario
Leverage Resources
Strategic Drivers
Risk Drivers
Market Penetration
Cost Optimization
Identification of Similarities and Differences within the Growth Phase
Similarities
Market Drivers
Cost DriversResource
Drivers
Strategic Drivers
Construction: Higher perceived Demand
risk
Pharmaceuticals & Telecom:
Lower perceived Demand
risk
Differences
The Maturity Phase
Introduction
An industry where growth is either saturated or is at the same/slower rate than at the broader rate of economic growth
The products/processes in the industry are standardized and the players compete mainly on price basis
Demand is saturated/slow-growing Players too willing to discount Eroding margins, profits, and returns Cost-cutting to stay ahead Consolidation of competitors Incremental Innovation Reinvestment rate is low
Characteristics
Aviation Industry (US) Oil and Gas FMCG Retail (US)
Examples of Industries in MaturityWhen is an industry in mature phase?
Various Possible Strategies
Strategic innovation Prime focus shifts to controlling
costs Image differentiation through
Complementary services Consolidation amongst the players Achieve Economies of Scale Incremental Innovation: Limited
opportunity for product and process innovation
Industry: US Airlines
Period under Consideration: 1997 – 2011 Healthy operating margins between 1997-99 Companies started collaborating Growth in passenger traffic was slowing down Price of Crude increase post 2000 Post 2000 the margins started to decline
Industry Characteristics
Source: Marketline
Strategic Alliance: Star Alliance
Collusion on pricing routes dominated by the JV
Cost reduction in the material/supplies obtained from suppliersIncrease negotiating power
Achieved in marketing, creating corporate deals
Attract passengers from non-aligned carriersDouble hubs used to create funnel routesImprove the operating loadPrice
Collusion
Increase Revenues
Joint Sourcing
Economies of Scale
The alliance currently comprises of 28 members
United (founder member), US Airways and Continental Airlines are now a part of this alliance
The Current Scenario
Alliance forged in 1997 – “The Airline Network for Earth”
Initially started with 5 members and subsequently grown to 28
Drivers for the AllianceThe Alliance
Industry: Automotive Industry (US)
Period under Consideration: 2011 – Present
Comprises of trucks, passenger cars and motorcycles
Volumes have increased at 4% Witnessed a serious contraction in 2008-
09 but market has recovered since then Firms mainly look forward to Merger and
Acquisitions
Industry Characteristics Projected Growth
Porter’s Five Forces
Source: Marketline
Source: Marketline
Strategic Alliance/Joint Venture: GM & PSA Peugeot
The alliance would also focus on reducing carbon emissions
To develop new global projects to broaden their alliance and seize new opportunities. Exploring opportunities in growth markets including Latin America and Russia, which represent priority regions for both Groups.
Formation of a global purchasing joint venture to cut down sourcing cost
Sharing of vehicle platforms, components and modules for product development
Long-term and broad-scale global strategic alliance that will leverage the combined strengths and capabilities of the two companies
GM and PSA Peugeot through this Joint Venture will purchase commodities, components and other goods and services from suppliers with combined annual purchasing volumes of approximately $125,000 million
The Joint Venture
Drivers for the JV
GM will take responsibility for developing both the new C3 Picasso and Meriva MPVs to replace Peugeot 208, Citroen C3and Vauxhall Corsa by 2016
The Current Scenario
Reduce Emissions
Sharing Knowledge
Explore new Opportunities
Reduce Cost of Sourcing
Identification of Similarities and Differences within the Mature Phase
Similarities
Focus on cost reduction from sourcing
Means to explore new growth opportunities
Combining forces would reduce the investment on R&D
Airlines: No focus
on reduction
of R&D
Automotive:
Reduce the R&D spend of each firm
Differences
The Decline Phase
Introduction
An industry where growth is either negative or is not growing at the broader rate of economic growth
As the industry becomes challenged by new industries that produce technologically superior substitute products
Costs become counter-optimal Sales volumes decline Profitability diminishes Decreasing demand Competitors start exiting
Characteristics
Railroad Steel (US) Newsprint Photofinishing Book Publishing DVD, Game and Video Rentals Garments (US) Wired Telecommunications Salt mining
Common Examples of Industries in Decline
When is an industry in decline?
Various Possible Strategies
Prime focus shifts to controlling costs
Re-inventing products and services Identifying and focussing on growth
segments within the industry Diversification Mergers, consolidations, alliances
and joint ventures Divestiture Make a quick exit!
Industry: Newsprint
Changing readership habits as readers turned to the Internet
The economic crisis severely impacted the industry Print advertising revenues plummeted Development of new journalism startups was
rampant, aided by low entry costs on the Internet Between 2008 and 2010, eight major newspaper
chains declared bankruptcy (E.g.: The Tribune, Sun Times Media Group, etc.)
Many smaller newspapers moved to Web-only publications
Newspaper publishing companies were forced to choose an optimal configuration of services and activities to survive
The Industry in Decline
Period under Consideration: 2000 - 2010 US Newspaper Industry was a USD 50 billion business
(2002) and employed 400,000 people 80% of revenues from print advertising Companies started adopting a cost leadership
strategy
Industry Characteristics
Strategic Alliance: Yahoo! Newspaper Consortium
Entry into the emerging industry trend
Newspapers would use Yahoo!’s ad-serving, targeting and inventory management
Newspaper content to be fully integrated within local news modules delivered across Yahoo! verticals
Classifieds and job-related advertisements posted on Yahoo! Hotjobs
Newspapers to integrate Yahoo!’s paid search across their sites
Graphic ads
Paid Search
Content Distribution
Industrial Evolution
Classifieds on the web
The Consortium is currently comprised of 36 holding companies and over 800 newspapers and drives 2 billion monthly page views and 100 million monthly unique visitors (2013)
Estimated consortium sales: USD 300 million (2013)
The Current Scenario
Alliance forged in 2006 Effort to combine the newspapers’ unmatched
local news and advertising reach with the technologies and audience of Yahoo!, to arrest the decline in the newsprint industry
Drivers for the AllianceThe Alliance
Industry: Book Publishing
Frightening rise of the e-book and e-book reader markets
Shipments of e-book readers to triple between 2010 and 2014
The Association of American Publishers reported that in Q1FY13, e-books outsold hardbound books for the 1st time (USD 282.3 million vs. USD 229.6 million)
Ease-of-access of delivery of e-books have made Amazon and Barnes & Noble the leaders in Internet retailing
E-publishing set to take centre-stage soon! Sales of brick-and-mortar book stores dropping Established publishers are desperately seeking a
sustainable way forward
The Industry in Decline
Period under Consideration: 2010 - present Most books are published by a small number of very
large book publishers, but thousands of smaller book publishers exist
The US Book Publishing industry is worth USD 28 billion and employs 78,561 people with an annual CAGR of -1.4% (2008-13)
Industry Characteristics
Joint Venture: Penguin – Random House JV
Together, they felt they could take on the e-book business more effectively
Would leverage each other’s resources to invest in rich content and emerging markets
Combining forces would give them the scale they need to compete with the growing challenges to their business
Aim for combined commercial success in what they do best
The JV would surge ahead of rival Hachette to become the biggest publisher in the world
Two of the world’s biggest English-language book publishers, Penguin and Random House formed this JV. The owner of Random House will have 53% of the venture with Penguin’s owner, Pearson, having 47%
Each company retains certain ‘exclusive’ rights and there are a variety of rules to protect each party
The Joint Venture Drivers for the JV
The Joint Venture was completed on 1st July, 2013 and would employ more than 10,000 people worldwide
The JV aims to publish more than 15,000 new titles every year across 250 imprints
Estimated annual revenue of JV: USD 3.9 billion
The Current Scenario
Greater resources
No. 1 Publishing Company
Better scale of operations
Stronger Platform
Combined success
Identification of Similarities and Differences within the Decline Phase
Similarities
The Internet and evolution of technology
adversely affected both industries
Alliances and JVs were
sought as a means of
survival
Combining forces was felt to be the best way forward
Newspaper: Alliance done to
merge with the
emerging technology
Books: JV done to
take-on the emerging
trends
Newspaper:
Consortium served as a means to
assist several players
Books: JV done only between 2
major players to
become the largest,
assisting only both of
them
Differences
Overall Similarities and Differences
Benefits of SA/JV in Different Phases
Resource shortage compensated by partners
Partnering with reputed firms to facilitate process of development
Reduced failure risk in new industry
Increased resources to develop the product and/or the market
Introductory Phase
Increased market access and rural penetration
Savings in operating expenses due to sharing of resources
Alliance helps in increasing the strategic focus of the partners
Collaboration helps in achieving economies of Scale and Scope
GrowthPhase
Cost reduction from sourcing
Price Collusion amongst the alliance partners
Reducing investment risk of the players
Gain economies of scale
Gain market power and be more competitive
Acquire new capabilities
MaturityPhase
SAs and JVs are done as a means of survival
Methods to either align with or take on the emerging technologies/trends which are causing the industry to decline
Interdependence for mutual benefits
Cost cutting is a key to survival
DeclinePhase
A Comparative Study of the Motivations behind SAs and JVs across different phases of the Industry Lifecycle
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