motivations behind strategic aliiances and joint ventures across different phases of the industry...

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


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%)


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


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


Period under Consideration: 2005-2013 Highly fragmented industry Total Market Size: 248,000 crore


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


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?


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


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


Alliance forged in 1997 – “The Airline Network for Earth”

Initially started with 5 members and subsequently grown to 28


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


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?


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


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)


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


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)


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


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

motivations behind strategic aliiances and joint ventures across different phases of the industry...

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