Corporate Strategy

Corporate Strategy
• Also known as Grand Strategy, Master
Strategy, General Strategy
• Pertains to the organisation as a whole
• Answers key questions:
– What businesses? Range of products?
– What geographic spread?
– What range of vertically integrated activities?
– How to manage the businesses?
 Strategy Alternatives
• Growth Strategy/ • Stability strategy
Expansion Strategy – Incremental growth
– Intensification – Sustainable growth
• Market penetration – Pause
• Market development • Retrenchment Strategy
• Product development – Divestment
• R&D – Turnaround
– Diversification – liquidation
• Concentric / horizontal • Combination Strategy
integration – Joint venture
• conglomerate – Strategic alliances
• Vertical Integration – consortia
– Backward
– Forward
 Growth/Expansion Strategy
• An organisation aims at substantially
broadening the scope of one or more of its
businesses in terms of their respective
customer groups and alternative
technologies, singly or jointly in order to
improve its overall performance.
– Influenced by external environment
– Influenced by internal environment
– Top management more satisfied
 Corporate Strategy
Ansoff Matrix
Current Product New Product

Current market Market Penetration Product

Development

Market Diversification
New market Development
 Market Penetration
• Concentration strategy
• Increase sale of existing product in existing market
• Least risky option
• Success depends upon
– Stages of PLC
– Intensity of competition
– Company’s position in the market
– Cost of attaining additional market share
• Tools
– Advertising
– Other marketing tools
 Market Development
• Existing products in new markets
– Creating new uses of the product (Du Pont’s
Nylon)
– Creating price segments by providing minor
variation in the product range (HLL’s
Toiletries)
– New territories
– New channels of distribution to expand
customer base
 Product Development
• New Products to the same market
– Quality improvement
– Feature improvement
– Aesthetic appeal
– Different placement of the product
– Creating entire product range
– Providing all accessories
• Strategy to prolong life cycle of the product
 Strategy at MSIL
Year Particulars
1981 Maruti Udyog Ltd. was incorporated under the provisions of the Indian
Companies Act, 1956
1982 License and JV agreement signed between Maruti Udyog Ltd. and SMC of
Japan
1983 Maruti 800, a 796cc hatchback, India’s first affordable car was launched
1984 Omni, a 796cc MUV was launched. Installed capacity reaches 40,000 units
1985 Launch of Maruti Gypsy (970cc, 4WD off-road vehicle)
1987 Exported first lot of 500 cars to Hungary
1988 Installed capacity reaches 100,000 units
1990 Maruti 1000 (970cc, 3 box), India’s first contemporary sedan launched
1992 SMC increases its stake in MSIL to 50%
1993 Zen (993cc, hatchback Car), which was later exported in Europe and elsewhere
as the Alto
1994 Esteem 1.3L (1298cc, 3 box car) LX launched
 Strategy at MSIL
1995 With the launch of second plant, installed capacity reached 200,000 units
1997 New Maruti 800 (796cc,hatchback Car) Standard and Deluxe launched. Produced
the 2mth vehicle since the commencement of production
1999 Launches Baleno, WagonR along with new variants of Omni and Zen
2000 Alto and Altura (luxury estate car) launched
2001 Maruti Versa (luxury MPV) launched
2002 Esteem Diesel. All other variants upgraded. Suzuki Motor Corporation (SMC)
increases its stake in MSIL to 54.2%
2003 New Suzuki Grand Vitara XL-7 launched. Production of 4mth vehicle. Listed on
BSE and NSE after a public issue oversubscribed 10 times
2004 Alto becomes India’s new best selling car. New variants of Baleno and Versa
launched
2006 Launched new version of WagonR that is WagonR Duo (with LPG kit)
2007 Swift Diesel and Zen Estilo launched.
2008 Maruti 800 Duo (LPG) launched on the occasion of word environment day
 Innovation
• New product in the new markets
– Radical innovation: Replace existing product
– Incremental innovation: Modify existing product
(technological enhancement)
• R&D is the most costly and risky strategy
• Gives great success
• Allen and Hamilton Inc’s Management Research
Department studied 51 companies
• Six stages of Innovation strategy identified
 Innovation
• Innovation:
– 58 new ideas generated
• Screening:
– 12 passed initial screening test
• Business Analysis:
– 7 passed product potential test
• Development:
– 3 survived actual attempts to develop the product
• Commercialisation:
– 2 appeared to have profit potential
• Success:
– Only 1 ultimately successful
 Diversification
• Diversification signifies entries into fields
where both product and market are
different from firm’s initial position
– Related: share any of the skill base of the firm
• Concentric
– Unrelated: does not share any of the skill
base of the firm
• Conglomerate
 Why Diversify?
• Peter Drucker
– To avoid the danger of overspecialisation
– Balance the vulnerabilities of own wrong size
– Use own strengths to exploit opportunities
• Ansoff
– Objectives can no longer be met by expanding within
existing product-market
– Retained cash exceeds demand for investment
– Greater opportunities outside the industry
– Expanding risk portfolio
 Concentric Diversification
• Diversify in related but distinct business
– Market related synergy
• Common Distribution channels
• Common Marketing skills
• Common customers
• Brand names
– Technology related
• Economies of scope
• Benefits
– Synergies created
– Market power increases
– Distinctive competence increases to other areas
– Reduced economic risk
 Concentric Diversification
Mahindra & Mahindra Ltd.
Automotive Domestic 4 Wheelers , Three Wheelers, Pik
– Ups, SUVs, UVs,

Mahindra International LCVs

First Choice Used cars - Purchase, Sale and
Finance
Mahindra Renault Ltd. Car ‘Logan’
Farm Mahindra Agribusiness Agri inputs and services
Equipment Farm Equipment Engines, Farm Implements
Mahindra Gujarat Tractors
Tractor
 Conglomerate Diversification
• Unrelated diversification: no relation either with
technology or market base or product range
– To reduce risk of concentration
– Mainly profit consideration
– Normally through acquisition mode
– Taking advantages of an expanding economy
– Migrating from business under threat due external
environment factors
– Personal choice of industrialists
 Conglomerate Diversification
Trade & Financial Mahindra Intertrade Ferro Alloys and Metal Scrap, Steel and Steel
Services Related Services, Technical Products and Services,
Toys and Apparel

Mahindra Insurance Brokers Insurance and Risk Management Services

Mahindra Finance Loans and Mutual Fund Distribution
Kotak Mahindra Bank Ltd. Investment and merchant banks, Banking services
Security brokers

Information Mahindra Logisoft Dealership Management and Facility

Technology Management
Tech Mahindra Software Solutions
Infrastructure Mahindra Infrastructure Developers Development of Infrastructure Projects
Development
Mahindra Acres Consulting Engineers Engineering consultancy

Mahindra Special Services Group Information Security Consultancy

Mahindra World City Integrated Business Cities
Mahindra Holidays & Resorts Lifetime holidays
Mahindra Lifespaces Living Spaces and Working Spaces
 Conglomerate Diversification
Systech Mahindra Composites Composites
Mahindra Engineering Engineering Services
Mahindra Forgings Forgings
Mahindra Gears Gears
Mahindra Steel Service CentreService Centre for Automotive and
Electrical Steels
Mahindra Sourcing Sourcing of Auto Components
Mahindra Steel Products Stampings and Steel
Speciality Mahindra AshTech Ash Handling Euipments for Power
Business Plants
Mahindra Logistics Corporate People Movement and
Supply Chain Management
Mahindra Defence Systems Defence Vehicles
 Risks of Diversification
• Demands very high level of managerial,
operational and financial competence
• Decreasing commitment to basic business
• Loss of attention and control
• Against the principle of core competence
 Integration
• Horizontal
– Similar to concentric diversification
– Normally through takeovers, mergers, joint ventures
– Strong internal R&D
• Vertical
– Forward
• Become own buyer
– Backward
• Become own supplier
 Vertical Integration
• Advantages
– Internal
• Reduced costs: inventory, overheads
• Improved performance an quality control
– Competitive
• Superior control over market
• Product differentiation
• Disadvantages
– Internal
• Burden of excess capacity
• Diseconomies of scale
– External
• Mobility barriers
• Loss of information on industry
 Stability Strategy
• Sustainable growth strategy
• Maintaining status quo
• Safety oriented
• Aimed at methodical moderate growth
• Incremental performance in one or more of its
businesses in terms of
– Customer groups: special package to institutional buyers
– Customer functions: better after sales service to existing
customers
– Alternative technologies: modernisation of plant
• Appropriate for a reasonably successful company in a
moderately attractive industry
 Profit Stability strategy
• A company with modest competitive
position and facing no or little growth may
aim at continuing the same course
maintaining profit by making little
adjustments in price and cost.
– Short term cut on R&D, advertising,
maintenance, etc.
– Moderate increase prices to adjust for inflation
 Pause/proceed with caution
Strategy
• When competitive environment is highly
unpredictable
• A temporary strategy to enable a company to
consolidate its resources after prolonged rapid
growth (or big losses) now facing uncertain
future.
– Dell adopted this strategy in 1993 when it grew 285%
and found it difficult to handle the growth.
– Ford Motors adopted it when it recorded a loss of 2.3
billion in 1991. the company believed that the
downturn was temporary and made some
adjustments
 Retrenchment Strategy
• Defensive strategy
• When nothing seems to give results
• Neither industry is attractive nor own
position is strong
• Involves partial or total withdrawal from a
customer group, customer function,
alternative technologies
• Results in slimmer organisation
 Turnaround Strategy
• When the organisation attempts to reverse
the process of decline and turn around to
profitability.
– Reduce unnecessary overheads
– Cost rationalisation
– Timeliness of every action very important
 Elements of Turnaround
• Change in top management
• Initial credibility building actions
• Neutraising external pressures
• Initial control
• Identifying quick payoffs
• Quick cost reduction
• Revenue generation
• Asset liquidation for cash generation
• Better internal coordiantion
 Divestment Strategy
• Also called divestiture or cutback
• Involves sale of a portion of the business
or a major division or profit centre or SBU
• Spin Off: sell stakes to another firm or to
employees or leveraged buy out and
make it a financially independent unit
• Sell out: outright sale of the company
 Liquidation Strategy
• Worst possible situation
• No hope of recovery
• Bankruptcy: giving up the control of the
firm in the hands of court in return for
some settlement for its obligations
• Liquidation: when company is too weak to
be sold off as a going concern
– Its assets sold for cash
Model of Corporate Strategies

Company’s competitive position

Strong Average Weak

High Vertical Horizontal Turnaround

Integration Integration
Industry Attractiveness

Proceed Profit Sell out

Medium with strategy
caution

Low Concentric Conglomerate liquidation

diversification diversification
 Combination Strategy
• Also referred as Mixed or Hybrid
Strategies
• Combination of Growth, stability and
retrenchment strategies adopted, either
simultaneously or sequentially
• Especially popular in case of multi
business firm
 BCG Growth-Share Matrix
• Growth rate of industry
– Percentage by which sales of a product line
increased over previous year
– Indicator of attractiveness
• Relative market share of the unit
– As its market share divided by its largest
competitor
– A market share above 1 belongs to the leader
 BCG Growth-Share Matrix
• Stars
– Market leaders
– High growth potential
– Require substantial resources
• Cash Cows
– High cash generation
– Normally former stars
• Question Marks/Cats
– Require more resources than generate
– Potential stars
• Dogs
– Barely support themselves
– Mostly drain others’ resources
BCG Growth-Share Matrix

Stars Question
Marks
Business growth rate

10

Cash Cows Dogs

1.5 1

Relative Market Share

 BCG Growth-Share Matrix
• Dos
– Invest heavily in Stars
– Maintain Cash Cows
– Use selective resource allocation to Question Marks
– Liquidate/divest Dogs
• Don'ts
– Do not leave too little cash with Cash Cows
– Do not invest too long in Dogs
– Do not maintain too many Question Marks
 BCG Growth-Share Matrix
• Healthy Portfolio
– More Stars an Cash Cows and few Question
Marks and Dogs
• Successful SBUs have life cycle
Question Marks Stars Cash Cows Dogs
 BCG Growth-Share Matrix
• Merits
– Quantifiable
– Easy to use
– Helps in future projections
– Helps in identifying primary strategy issues
• Demerits
– Considers extreme positions
– Market growth rate and share, each based on single
parameter
– Not appealing terminology
 GE Business Screen
• GE Multi Factor Portfolio Analysis
– An improvement over BCG Matrix
– Many factors to measure industry
attractiveness and market position of the unit
– Nine cell Matrix
– More pleasant terminology
 GE Business Screen
• Industry Attractiveness
– Market growth rate
– Industry profitability
– Size of the market
– Pricing policies
– Other opportunities and threats
• Competitive Strength of the unit
– Market share
– Technological position
– Profitability
– Size of the unit
– Other strengths and weaknesses
 Preparing GE Business Screen
• Select criteria to rate industry attractiveness for each
product line
• Assess overall industry attractiveness on a scale of 1-5
• Assess business unit strength on scale of 1-5
• Plot each unit’s current position on the nine cell matrix as
a circle where:
– Area of circle is proportional to the relative size of the industry
– Pie slice represents market share of the unit
• Plot the firm’s future portfolio assuming no change in
corporate strategy
– Is there a gap between projected and desired position?
– If yes review company’s vision, mission and strategy
 GE Business Screen
Company’s competitive position
Strong Average Weak

Winners Winners Question

High Marks
Industry Attractiveness

Winners Average
Business Losers
Medium

Profit Losers Losers

Low Producers
Business level Strategy
 Business level Strategy
• Integrated and coordinated set of
commitments and actions designed to
provide value to the customers and gain a
competitive advantage by exploiting core
competencies in specific individual product
markets.
• Also called as competitive strategies
 Business level Strategy
• Basics: who, what, how
– Need to identify who my customer is?
– What needs of the customer will I satisfy?
– How would I satisfy those needs?
 The customer
• Market segmentation: a process through which people
with similar needs are clustered into individual
identifiable groups.
• Market segmentation creates a framework for selection
of business strategy
– Average customer may be misleading
– Need to identify specific customer
• Basis for segmentation
– Consumer markets: demographic, social, economic, geographic,
psychological
– Industrial markets: technological, geographic, customer size
 Customer Needs
• Identify and cater existing needs
– Listen to customers
– Study customers’ influences on products, technology,
distribution
• Anticipate and satisfy unknown needs
– Being able to positively surprise the customer
– Provide customers unexpected value
– First mover advantage
– Gain an early competitive advantage
 Satisfying customer needs
• Use core competencies to implement
value generating strategies to satisfy
customer needs
– Technology
– Service
– Reach
– Variety
 Generic Strategies
• Concerned with a firm’s industry position
relative to those of competitors: Porter
• Firm can have either of the two competitive
strategies
– Lower cost
– Differentiation
• Firm’s competitive advantage in an industry is
determined by its competitive scope
– Broad target: middle of the mass market
– Narrow target: niche market
• Combining the two strategies with two types of
scope gives four generic strategies
 Generic Strategies

Cost Differentiation
Competitive Scope

Target
Broad
Leadership

Focused
Focused
Narrow
Target

Cost
Differentiation
Leadership
Cost Uniqueness

Competitive Advantage
 Cost Leadership

• Low cost competitive strategy aiming at broad

mass market
• Low cost lower price satisfactory profit
margins
– Rigorous cost control
– Large scale operations
– Minimum wastages
– Avoidance of marginal customer accounts
– Minimum R&D, advertising, sales force etc.
 Cost Leadership
• Competitive risks
– Technology may become obsolete due to low
emphasis on R&D
– May remain unaware of changing customer
needs
– May find amidst a differentiated market which
was earlier undifferentiated
– Threat of imitation
 Differentiation
• Aimed at broad market with a unique product where firm
may charge a premium
• Uniqueness in:
– Unusual features / Design
– Rapid product innovation
– Brand image: perceived prestige and status
– Technology
– Dealer network
• Challenge is to identify features that create value to the
customer
• Earns above average returns
 Differentiation
• Competitive risks
– Price differentials between differentiator and
cost leader may be too large
– Cannibalization: new product may eat away
old product market
– Threat of imitation
– Increased awareness may take away
pereived brand image
 Focused Strategies
• Focus strategy is an integrated set of
activities aimed to serve the needs of a
particular target group
– A certain consumer group
– An industry segment
– A product line
– A geographical segment
 Focused Cost Leadership
• Cost leadership as applied to a focused
market or narrow target
• Firm seeks cost advantage in a target
segment
• Requires trade off between market share
and profitability
 Differentiation Focus
• Differentiation to serve unique needs of a
small group
• Strong understanding of customer needs
• Very strong R&D
• Integration of all activities
 Risks of Focus Strategies
• Target segment becomes unattractive
• Demand disappears
• Difference between segments narrows
down
– Broad target becomes more attractive
• Threat of imitation
– New focusers subsegment the industry
 Competitive Tactics
• A tactic is a specific operating plan for
implementation of a strategy
• Tells how, when (timing) and where
(market) of strategy
 Timing Tactics
• First mover
– Pioneer
– Higher market share than late entrants
– Long term profit advantage
• Late mover
– Imitators
– Learn from mistakes of pioneer
– Minimize cost on R&D, market creation
– Market segmentation (usually ignored by first mover)
 Location Tactics
• Offensive Tactics
– Frontal Assault
• Head to head in every aspect from price to product to distribution to
promotion
• Very costly and needs huge resources and perseverance
– Flanking Maneuver
• Attack a part of the market where competitor is weak
• Patience and careful expansion in undefended markets
– Encirclement
• Usually evolves from Frontal Assault or Flanking Maneuver
• Attack with entire product range and many markets
– Bypass Attack
• Cut the market out from under the established defender
• Development of a new version of a product to cater unsatisfied needs of
consumers
– Guerrilla Warfare
• Hit and run
• Small, intermittent attacks on different segments
• Usually adopted by new entrants for short term gains
 Location Tactics

• Defensive Tactics
– Raise Structural Barriers
• Offer a full line of product
• Block channel access by signing exclusive agreements
• Raise buyers’ switching cost
• Keep price low
• Patenting, franchising
• Influence government to create barriers
– Lower inducement to attack
• Make industry unattractive by reducing future profit expectations
• Deliberately keep prices low and invest in cost reducing measures
• Highlight the problems
 Functional Strategies
• Marketing Strategy
• Financial Strategy
• Research and Development Strategy
• Operations Strategy
• Human Resource Strategy
 Strategies to Avoid

• Follow the leader

– SWOT necessary
• Hit another home run
– Pioneers may be stuck with success of first idea
– Very few are second time lucky
• Arms race
– Entering into a spirited battle
• Do everything
– Ignore core competency
• Losing hand
– Fixation with a project where huge investment has gone
without much success
– May ultimately lead to bankcruptcy
Cooperative Strategy and
International Strategy
 Co-operative Strategy
• Co-operative relationships occur at various
points in a firm’s value chain and can be
visualized on a continuum ranging from
infrequent transactions to full involving mergers
and acquisitions.
• All offer opportunity to combine the relative
resources and technologies of the firms, but in
different ways and with different consequences.
Co-operative Strategy/ Alliance
Strategic International Alliances
 Forms

• Licensing: a company grants rights to intangible property to

another company (Microsoft server applications)
• Franchising: a specialized form of licensing in which the franchiser
not only sells an independent franchisee the use of a trademark but
also assists on a continuous basis in the operation of the business.
Franchising dates back to at least the 1850s; (Singer sewing
machines). (Recently McDonalds)
• Management contracts: arrangements whereby, for a fee, one
company provides personnel for another company. (Latur Water
Management Co Ltd, a SPV formed by integrating three companies
to manage water supply from source to tap)
• Turnkey operations: involve a contract for construction of
operating facilities that are transferred for a fee to the owner when
they are ready to commence operations. (Stone-Tec Inc. of Garland,
Texas)
 Forms
• Equity alliances: involves a company’s equity position in the
company with which it has a collaborative arrangement (Fuji
Xerox)
– The purpose of equity ownership is to solidify a collaborating
contract
• Consortium: when two or more organizations participate, this
is what the resulting joint venture is sometimes called. (Airbus
Industries, UGC-DAE Consortium for Scientific Research)
• Joint venture: In a joint venture, two or more "parent"
companies agree
– to share capital, technology, human resources, risks and
rewards
– in a formation of a new entity under shared control.
• Mergers and Acquisition: One company is acquired by
another or two companies merge together to form a new entity.
(DaimlerChrysler)
International Collaborative Forms
 Motives for International Collaborative
Arrangements

• Spread and reduce costs

• Specialize in competencies
• Resource-based view of the firm holds that each company has a
unique combination of competencies
• Control Competitive factors
• Secure vertical and horizontal linkages
• Horizontal linkages may increase a company’s product line
• Companies may lack the resources to go it alone
• Glean knowledge
• Gain location-specific assets
• Overcome legal constraints
• Diversify geographically
• Can help a firm smooth its sales and profits
• Minimize exposure in risky environments
 Strategic Alliance
• Alliance has become an important strategic tool (Hagedoorn,
1993).
• Strategic alliance (SA) is voluntary arrangements between
firms to exchange and share knowledge as well as resources
with the intent of developing processes, products or services
(Gulati, 1998).
• A strategic alliance may also be defined as a collaboration
between two or more organizations leveraging the strengths
of each other to achieve strategic goals.
• Hence, a strategic alliance provides the potential for
accomplishing a strategic objective or task quickly,
inexpensively and with relatively high prospects for success
because the firms may reach synergy by combining existing
assets and skills (D. Aaker, 1995).
 Strategic Alliance

• Strategic Alliances are cooperative agreements

between actual and potential competitors to exploit
market opportunities
• A strategic alliance (Chan et al., 1997,) enables a firm
to focus resources on its core skills and competencies
while acquiring other components or capabilities it
lacks from the marketplace.
• While alliances are used extensively, researchers
have produced evidence suggesting that many, if not
most, alliances do not live up to expectations or even
fail altogether (Kogut, 1989).
 Why strategic alliances?

• Direct capital infusion in exchange for equity and/or

intellectual property or distribution rights;

• A “capital substitute”, by which the resources that

would otherwise be obtained with the capital are
obtained through joint venturing.

• A shift of the burden and cost of new-product

development (through licensing) in exchange for a
potentially more limited upside;
 Why strategic alliances?

• An entry strategy into new domestic or overseas

markets through partnering or joint ventures;

• Distribution and commercialization; and

• Financial savings through sharing the risks and the

costs of commercialization, marketing, distribution,
and other expenses.
 Why strategic alliances?

• Satisfy customer demand

• Share R&D costs, fill knowledge gaps
• Scale economies [volume economics]
• Scope economies [coordination economics]
• Jump market barriers
• Compress time, speed up process logistics
• Pre-empt competitive threats
• Use excess capacity
• Cut exit costs
• Cheaper than acquisitions
 Why strategic alliances?

• Developing new markets (domestic/international);

• Developing new products
• Developing and sharing technology;
• Combining complementary technology;
• Pooling resources to develop a production/distribution facility;
• Acquiring capital;
• Executing government contracts; and
• Access to new distribution channels or networks or sales and
marketing capability.
Phases of strategic alliances

– Alliance Business Case

– Partner Assessment and Selection

– Alliance Negotiation and Governance

– Alliance Management

– Assessment and Termination

Each Phase requires different variables for attaining end-game

Strategic Alliances Formation

MOTIVES
>Resource Sharing STRATEGIC
>Cost Reduction ALLIANCE
>Increased Efficiency

DRIVERS
> Firm Characteristics
> Industry Chars.
> Environment Chars.
Mode for organizing an alliance
along a continuum
Short-term contracts Options for alliance Long-term contracts

Medium-term contracts

Moderate performance,
cost, management time
and risk
Low performance High performance
Low cost High cost
Low management time High management time
High risk Low risk

Minority equity 50:50 equity Majority equity

investment partnerships investment

Mode of alliance
 Strategic Alliances
Strategic Alliances are part of:
-strategic moves,
-change-management
-knowledge-management
Partner Assessment and Selection

• Compatibility
– Culture
– Product/market

• Capability
– Complementary strengths, stability
– Has the capability been scrutinized
– Visible vs. invisible competence

• Commitment
– The exit cost
Alliance Negotiation and Governance

• Framework of contract

• Performance clauses

• Restrictions on the partners and liability

• Contractual changes, dispute resolution, share

disposal and alliance termination

• Identity and role of negotiators as well as the

interaction between managers and their lawyers
 Alliance Management and
Assessment

• A complementary unified force or purpose that bonds the

companies together
• A management team committed to the success of the venture
• A genuine synergy, in which the “sum of the whole truly exceeds its
individual parts”
• A cooperative culture and spirit between the strategic partners that
leads to trust, resource-sharing and a friendly chemistry between
the parties
• A degree of flexibility in the objectives of the joint venture to allow
for changes in the marketplace and an evolution of technology
• An alignment of management styles and operational methods
• Focus and leadership
 Termination of SA

Break-down

Success Failure
[competence [expectations?]
is transferred]
Irrelevant
[ M&A ]
 Joint Venture
• In a joint venture, two or more "parent"
companies agree to share capital,
technology, human resources, risks and
rewards in a formation of a new entity
under shared control.
 Joint Venture Formation

• Screening of prospective partners

• Joint development of a detailed business plan and
shortlisting a set of prospective partners based on their
contribution to developing a business plan
• Due Diligence- checking the credentials of the other
party
– ("trust and verify" - trust the information you receive from the
prospective partner, but it's good business practice to verify the facts
through interviews with third parties)
 Joint Venture Formation
• most appropriate structure
– most joint ventures involving fast growing companies are
structured as strategic corporate partnerships
• special allocations of income, gain, loss or deduction
to be made among the partners
• compensation to the members that provide services
• development of an exit strategy and terms of
dissolution of the joint venture
 Business strategy
• A successful joint venture must begin with a
sound, well-articulated business strategy.
• Before moving forward, companies must be able
to determine and explain
• why they wish to enter into a joint venture,
• why they have chosen their partner or partners,
• what they hope to achieve.
• what the organizations' involvement will be
(managerial, capital, etc.) and
• how long the JV will last.
 Business strategy

• It is critical that strategies be put in place to define

governance, accountability, decision-making
processes, and conflict- and issue-resolution
procedures.
• Parent companies also have to ensure buy-in and
participation at the highest levels.
• Finally, and ironically, smart companies consider
outcomes even before they begin: What would
cause them to terminate the joint venture, and what
is the preferred exit strategy?
 Benefits from JV

• The opportunity to obtain new capacity and

expertise.
• Enter into related businesses or new geographic
markets or obtain new technological knowledge.
• Do not represent a long-term commitment.
– Companies can gradually separate a business from
the rest of the organization while allowing a buyer to
assess the true value of intangible assets such as
brands, distribution networks, people, and systems,
as well as learn how the business operates.
(approximately 80% of all JVs end in a sale by one
parent to the other.)
 International Joint Ventures
• A Joint Venture is considered international if at
least one partner is headquartered outside the
country of operation or if the venture operates
significantly in more than one country.
• Hence, an IJV can be defined as inter company
collaboration over a given international
economic space and time for the attainment of
mutually defined goals.
 Possibilities of International
Joint Ventures

Case Home Place of Home Place of Place of IJV Types of IJV

company A company B
1 India India India Domestic JV

2 Foreign Foreign India Trinational IJV

3 India Foreign Foreign Traditional IJV

4 India Foreign India Traditional IJV

 Top Ten sectors of IJVs in India (in
terms of numbers)
S.N0 Name of Industry Area of IJV Created Total No. of Total Foreign
IJVs Equity (Rs.
Finance Technology
Crore)

1 Computer software 1560 5 1565 2059.76

2 Business consultancy 470 20 490 2074
3 Misc. other services 339 26 365 1096.36
4 Trading 352 1 353 1198.17
5 Misc. manufactured articles 281 22 303 429.14
6 Other Telecommunication 255 3 258 4751.02
services
7 Automobile ancillaries 127 118 245 1707.48
8 Drugs & pharmaceuticals 168 41 209 4455.92
9 Hotels & restaurants 114 57 171 748.38
10 Electronic equipments 143 25 168 217.83
Top Ten sectors of IJVs in India (in
terms of Foreign Equity)
S.N Name of Industry Total No of Foreign Equity (in Rs. Total Foreign
IJVs Crore) Equity (in
Rs Crore)
Finance Technology

Commercial complexes 88 6350.34 0 6350.34

Refinery 38 5901.94 0 5901.94
3 Misc. financial services 85 5475.71 0 5475.71
4 Other telecommunication 258 4751.02 0 4751.02
services
5 Brokers 19 4728.54 0 4728.54
6 Drugs & pharmaceuticals 209 4455.92 0 4455.92
7 Cement 5 2946.91 0 2946.91
8 ITES 156 2632.34 0 2632.34
9 Banking services 23 2527.95 0 2527.95
10 Business consultancy 490 2074 0 2074
Top Ten points of origin of foreign partners in India
from 2002 to 2007(IJVs number wise)

S.No. Country Names Total No. of Foreign Equity (in Rs. Crore) Total Foreign
IJV Equity (in Rs.
Crore)
Finance Technology

1 USA 2097 8080.22 33.67 8113.89

2 Mauritius 665 21280.9 0 21280.85
3 UK 644 6336.03 0 6336.03
4 NRIs 533 11193.9 7.24 11201.17
5 Germany 527 1343.53 0 1343.53
6 Japan 443 2459.6 0 2459.6
7 Singapore 395 2102.75 0 2102.75
8 Netherlands 355 2672.19 0 2672.19
9 Switzerland 208 965.74 84.18 1049.92
 Why JVs fail?

• The philosophy governing expectations and

objectives of the joint venture is unclear.
• There's an imbalance in the level of investment
and expertise brought to the joint venture by
the two parent organizations.
• The senior leadership and management teams
for the joint venture receive inadequate
identification, support, and compensation.
 Why JVs fail?
• The JV partners possess disparate, and often
conflicting, corporate cultures and operational
styles.
• The JV's size is modest compared to the two
parent organizations.

Among the most common causes of failure cited

by CEOs in the Conference Board study were
poor or unclear leadership (49%), different
cultures (49%), and a poor integration process
(46%).
 Consortium

• Consortium is a word that comes from the

Latin ; from the word consors meaning
owner of means or comrade.
• consortium meaning association or
society. Usually this word refers to a
temporary business organization created
by businessmen or companies in order to
carry out a certain task.
 Critical Issues

• Creation of consortium
• Common objectives
• Structure and strategies
• Processes and control mechanism
• Sharing of benefits
• Government interventions and initiatives
• Implications for economic development
 Important Factors

• The competitive advantages of SMEs consortia

are based on three aspects : specialisation,
cooperation and flexibility.
• Government Policy and initiatives play a significant
role in the development of these consortia
(UNIDO,1997)
• A firm’s R&D capabilities, network formation
through past consortia, encounter with
other firms in product markets, age, and
past participation in large-scale consortia
positively affect its tendency of consortia
formation.
Mariko Sakakibara 2002
 Important Factors

• In a sample of 312 Japanese firms in 74

industries between 1969 and 1992 it is found that
a firm in an industry with weak competition and
appropriability conditions has a higher rate of
consortia participation.
• Industry wide agreements tend to have socially
beneficial effects when
– the degree of product market competition is low,
– a high degree of sharing is technologically feasible,
– the agreement concerns basic research rather than
development activities.
Consortium : Strategic Alliance

Participants

Resource secorP
Creation &
Consortium
and sharing erutcS

Motives &
Drivers
 Evolution of Consortium
Stage I : Competitive Stage II : Pre- Stage III : Co-
Competitive opetitive

•Domestic •Domestic, •Domestic,

Horizontal Horizontal Horizontal, Firm
to firm
Firm to firm Firm to firm
•Domestic,
•Domestic, vertical,
vertical,
consortium to
consortium to
consortium
consortium
•International,
Horizontal,
consortium to
consortium
 Mergers & Acquisitions
• One in which a controlling stake is acquired in the target.
• An equity deal with any lesser percentage is defined as
an equity alliance.
• An acquisition can be for the totality of the equity
interests of another entity or only a part of its equity.
• The legal form of what has been purchased can usually
be modified into another legal form.
• Thus, a limited partnership can purchase the entire
equity interests of a private limited liability company and
convert it to a share corporation
 Why alliances break up?
• Changes In strategy, leadership

• False expectations Markets, partners, technology

• External sabotage :Distributors

• Financial pressures : Different motives among stake

holders

• Changes in policy : Exit policy, competition policy etc