Lucky MT a Joint Venture of Two Companies Medtech and Telnet - Essay Example

?Critically analyse the situation facing Lucky MT, drawing on your learning across the entire module. What recommendations would you make to the business regarding its future strategy? Introduction Lucky MT, a joint venture of two companies Medtech and Telnet seems to be on the rocks within a few years of establishment. The joint venture has been successful but in the recent times, there have been many challenges within the company almost confirming the theory most joint ventures fail after sometime (Chartered Institute of Management Accounts, 2010). While the sales have been increasing, profitability of the venture has been dwindling. At the same time, one of the owner partners is not comfortable with the joint venture while the other is very comfortable. These issues may be related to the formation of the joint venture and the subsequent launch. It seems that a lot of issues were not looked at well including Lack of proper organization, lack of good launch and operation strategy, lack of a good exit strategy, diverging interests in the joint venture and the increasing competition from other companies in the same field and in other regions. Lucky MT needs to revise its strategy and come up with a better organizational structure, improved outsourcing strategies, international cultural management skills and drafting policies and regulations to be followed by the partner companies, the management of the joint venture and the employees. Addressing these issues can assist in encouraging common goals between the partners which is critical in withstanding the current storm of issues and to get more customers to increase profitability and encourage better growth. This information also provides knowledge to other companies that may be thinking on the lines of establishing joint ventures in the future. Lucky MT overlooked many things which are discussed below and recommendations provided. Nature of Joint Venture Business While Lucky MT found it necessary to form joint venture, which is beneficial to the company in sharing capital expenditures and risks, the company did not do well in this department. Looking at the company, it was initially founded by two companies. Later, the two companies decided that the joint venture, Lucky MT gets to a joint venture with another company in Singapore to participate in the international market better and more easily while getting a competitive edge. However, the partners in the joint venture overlooked the consequences of getting into joint ventures with international companies. As the partners confirm, the involvement in many joint ventures decreased the profit share of each partner involved (Lucky MT document Pages 3). When looking to get into joint ventures, the partners should look for businesses that can generate enough profits for all the partners involved. However, this was not the case for the Lucky MT. The partners chose the Electronic Manufacturing Industry which is quite profitable. However, this industry is capital intensive and also very expensive to maintain. Basing on that the company is relatively small; it would be a challenge to maintain the business. At the same time, the returns from the industry were quite small compared with the investment made in the Joint Venture in Singapore. The returns of the company were 2.5 million dollars in the year 2000. Being an international joint venture with several partners, this is little profit and each of the partners gets a little share of the profit. An international venture would be expected to generate good profits for each partner to get good profits. However, a joint venture generating good profits has been just a pipe dream. According to Dennis Campbell and Antonida Netzer (2009), joint ventures take a long time before they become profitable. In addition, they also take longer to break even which may be a challenge to the partners of the venture. Top of Form Bottom of Form This discourages many of the joint venture partners as they expect profits when they get involved in the ventures. It is no wonder that Dennis Campbell and Antonida Netzer (2009) confirm many joint ventures end up in losses rather than profits leading to their collapse a few years after they start. According to the Chartered Institute of Management Accounts (2010), about 40% of joint ventures end up in divorce by the fifth year of operation. Lucky MT faced a number of challenges in its existence which threatened the company’s success. While sales were increasing, the profits were decreasing and if there were not good intervention procedures, the company could easily end up in losses. This confirms the opinion by Dennis Campbell and Antonida Netzer (2009) and the Chartered Institute of Management Accounts (2010). Recommendations Joint ventures have been in the center stage for some time now for their lack of success in most cases. The knowledge that joint ventures do not do well should have compelled the owners of the joint venture to research more on the suitability of the joint venture they were to start. Suitability is multifaceted and should include factors like the nature of business, the profitability of the business, the best place to set up that kind of business and whether each partner is compatible with the business model. Each partner has to work hard to determine whether the other partner is the best there is or there can be better. According to Hajidimitriou and Georgiou (2002) and Varis, Kuivalainen and Saarenketo (2005), the choosing of the joint venture partner is the most important step and determines the future success of the venture. The right choice definitely leads to success while the wrong choice leads to failure of the joint venture sooner or later. Once these factors have been confirmed, the partners have to discuss the best business and where to settle to maximize on profits and minimize on expenditures. In the case of Lucky MT, the nature of business chosen was good and well profitable. However, the partners seem like they did not settle for the best place for the business. It would have been better to set up the business in relatively cheaper cost regions in contrast to Singapore which is a medium manufacturing cost zone. Partners should also do enough research to determine regions that are sustainable and the changing market dynamics. For example, any companies looking to set up in Singapore should be aware of the increasing business costs and the lack of enough skilled labour in the country as Deloitte research on competitiveness index (2013) puts it. Human resources Many researchers confirm joint ventures especially the international ones are not worthwhile. Randall S. Schuler (2001) claim that getting into a joint venture with another company is one thing and making it succeed is another thing. According to him, many joint ventures collapse along the way as much as partners want them to succeed. The major challenge for most joint ventures is human resources. Looking at the Lucky MT report, the company confirms there were numerous human resources challenges in Singapore. Data indicates Singapore has been on the receiving end for lack of skilled labor. In that case, any company establishing in Singapore may experience challenges in getting workers including Lucky MT. The company had to go the extra mile of taking people back to the United States to train adding to the capital expenditure of the joint venture company. This challenge faces many companies establishing offices in foreign lands as Peter J. Dowling, Marion Festing and Allen D. Engle (2008) confirm. These authors claim most companies getting into joint ventures especially international joint ventures have challenges getting enough trained personnel. At the same time, the company has challenges managing the resources they obtain. Prescott and Swartz (2010) support this school of thought. They claim joint ventures in the international markets face these challenges and may threaten the success of the company in the future. Cyr (1995) claims the challenge of managing the resources is as a result of a mix up in the human resources policies. Managers of the joint ventures do not know whether to use the same policies used by the parent companies or to be independent. In most cases, the joint ventures have to follow the policies of the parent companies as they make the decisions on what is to be done in the joint venture and what cannot be done. In this case, the managers and boards of the joint ventures have no option but to do what the parent companies propose. It is worth noting the policies and regulations of the parent companies may not necessarily work on the joint venture company. Lucky MT case study confirms this theory. The company was very dependent on the parent companies and could be the reason the company was not performing so well. Recommendations According to Sharad Visvanath (2009), the joint venture should be independent of the parent companies. The parent companies have varying opinions and objectives of the joint venture and could compromise the success of the venture. In this case, the parent companies should make the joint venture fully independent with their own managers, decision making process and recruitment of the necessary labor force. Independent joint ventures should not be affected significantly by the parent company decisions. Having independent joint venture managers can really work to the advantage of the parent companies. In most case, parent companies come together to establish a whole new company which may deal in the same products and services or different. In that case, the parent companies managements may not have enough knowledge and skills on running the company. Parent company management may have the knowledge but are overwhelmed by their respective responsibilities and may not handle the responsibilities of the joint venture as well. The independent management could provide better advice to the board and make better decisions impacting the success of the company. It would have been better if the parent companies had made the joint venture independent from the word go. The managers of Lucky MT Company could inform the owners of the parent companies the importance of independence of the joint venture. This was not the case and would indicate the managers of the joint venture did not understand well how to manage joint ventures. According to Peter J. Dowling, Marion Festing and Allen D. Engle (2008), most international joint ventures have challenges getting good managerial and foreign representation to provide good advice and propositions the company. The Lucky MT owners were responsible for getting a good manager with experience in international joint ventures to make the joint venture successful. According to Beamish and Lupton (2009), this is the only way to focus on what is best for the joint venture rather than individual partner interests. The parent companies have to be careful choosing a good manager. Li, Xin and Pillutla (2002) point out that some managers can favor one of the parent companies at times. In fact, these authors' research indicates more than 60% of managers and employees in international joint ventures favor one of the parent companies. In such cases, the manager is likely to make decisions that favor the company they favor and not in favor of the other parent company. This is likely to create more diversion between the two companies and solving conflicts would just be an illusion. In this case, the companies have an obligation to getting an impartial manager for the success of the joint venture. Getting such managers can be done based on the experiences of the managers. They may not be many such managers in the world but they can be accessed if the parent companies are determined enough to make the joint venture a success. In the case of getting skilled labor in Singapore, Lucky MT would have approached the strategy differently. Instead of getting people to take to the United States for training, the company would have looked for local skilled labor or import from the neighboring countries. It would have been cheaper doing that in contrast to what was done. Alternatively, the company would have trained the laborers in Singapore instead. However, the cheapest option would be to get already trained people. Although this could have been a challenge, Lucky MT could have gotten skilled laborers by offering better salaries. Taking into account the money that was spent in training the number that was flown to the United States for training; the money would be enough to hire well skilled and experienced personnel. Another strategy that would have been used is taking trainers to Singapore instead of taking the laborers to the United States for training. Cultural Challenges Many companies owned by people from a certain country but operating in other countries may have cultural challenges. In such organizations, managers and the working force may be from varying backgrounds. Looking at the Lucky MT, the owners are American but the working force is from Asia. Americans and Asians operate very differently. For example, Americans are usually individualist in which they may not necessarily consult before making a major decision. On the other hand, Asians are usually collective and prefer communication and negotiation all the time. At the same time, Asians are very quiet and conservative in the work place in contrast to Americans who are outspoken and eloquent. These characteristics make it very challenging when there is mix up between Asians and Americans. Some experts claim that the differences make it a challenge to obtain information from the workers. In that case, the business managers may not know how to approach the issue well (Bowerman and Wart, 2010). Managers who appreciate diversity appreciate the benefits that come with it. Ireland and Hitt (2005) confirm diversity is critical for the organizations looking to be ahead of their competitors. According to them, organizations with a diverse work force have better problem solving skills taking into account the strengths and weaknesses of each member. At the same time, they are able to come up with better suggestions at all times. Diverse workforce is common in organizations which have operating offices and manufacturing plants in other countries (Mor Barak, 2010). Lucky MT fits into the category of organizations with a diverse workforce. As stated above, the company is owned by Americans and the work force is from Singapore. While diversity is good, it may hurt a company if it is not well managed. Peter J. Dowling, Marion Festing and Allen D. Engle (2008) confirm diversity is one of the major challenges in International Joint Ventures. Some of the issues that may arise in an organization with a diverse workforce are prejudice and discrimination. Asians and Americans are very different in many ways including how their leadership strategies are carried out. In fact, they are in total contrast of each other and the leadership strategies may overlap. In that case, Americans and Asians do not trust each other completely. This may create a big problem in such organizations and can be disastrous (Bowerman and Wart, 2010). Recommendations The right diversity and cultural management strategies can give the company a competitive edge I the international markets. These strategies revolve around several things. Diversity training in which people from different races and geographical regions get to appreciate the opinions and viewpoints of people from other races and geographical regions should be advocated (Chartered Institute of Personnel and Development, 2013). This is very important for joint ventures like Lucky MT which have people in total contrast in business leadership and management. As stated above, Asians from South East Asia and Americans are very different in work places and have different business strategies. Open communication among the employees, the management, the parent companies and advisory or company boards has to be enhanced. All people in the organization should be free to express their views at all times and the parent companies and the management of the joint venture should encourage them (Ryan, n.d). Outsourcing Challenges Another challenge Lucky MT faced was the ability to analyze the best suitable market. Peter J. Dowling, Marion Festing and Allen D. Engle (2008) agree that most international joint ventures face this challenge. The Lucky MT case study indicates all this. In the case study, the company partners chose to have the joint venture in Singapore. This is a good place to set up an industry but at the time, the trends were changing. Other companies in the same sector were moving to other countries where they could provide goods and services much cheaper. This would allow such companies to set better prices because of the low cost of production. Lucky MT partners had realized the changes in trends but they did nothing, which could potentially compromise their customer base and profitability. In page 18 of the case study, the partners of Lucky MT confirm that the region their joint venture is in is a high cost manufacturing region. In that case, the costs expenses are high which increases the price of their goods and services. It is no wonder that most companies in joint ventures have challenges competing with their competitors. Peter J. Dowling, Marion Festing and Allen D. Engle (2008) note that many joint ventures have challenges competing because of this reason. Lucky MT case study confirms that the company had challenges dealing with the stiff competition especially from the companies that have manufacturing plants in the low cost markets. By the time the company owners were thinking of opening a manufacturing plant in the low cost countries, the competitors were very ahead of Lucky MT. It would be expected Lucky MT would take time to investigate the best places to set up an industry before venturing to it. The company has enough resources to employ well experienced personnel to advice the company on that accordingly. With that, the company would have settled for one place once and for all. The company would have avoided the cost used for establishing a joint venture in Singapore and proceeding to start a manufacturing plant in low cost labor countries like India and Malaysia. International business experts agree the best way a company can succeed while establishing a joint venture in another country is studying the market dynamics well. The company can determine the best place to establish and settle. Recommendations To maintain a competitive edge, Lucky MT would have worked right on track with the competitors. In that case, when they know their competitors are establishing plants in other countries, they should investigate properly the reasons why the competitor is establishing a plant there. With enough resources, which Lucky MT seems to have, the company would have gotten enough information on time and follow in the footsteps of the competitors. Looking at this critically, it can be assumed that both the managers and the owners were not keen on the changes in the market dynamics or they were not willing to take risks early. Of course any company that has to succeed especially in the international markets has to take immeasurable risks. In addition, the company ought to have contracted experienced international businessmen to obtain information on the current market dynamics. These experts can provide invaluable information on the best regions to set up businesses in. at the same time, it would be important for the company to determine the changes in the international markets. One region becomes better at some time and becomes common and investors start looking for other regions to invest in. this is important in establishing a sustainable solution to the international markets. Diverging Interests Lack of common goal among the partners is another major problem. As stated in page 3, the partners had divergent goals and aspirations. Medtech uncomfortable on reliance to Lucky MT while Telnet liked the relationship and wanted to continue with it relationship will telnet. Many business experts agree this is by far the most challenging factor in joint ventures. The divergence in interests among the partners is not well understood but it is certain it would cost the business much. This challenge would have been avoided in a number of ways. It is very important for any company looking to get into joint ventures to search carefully for the partner to work with. Experts believe that most of the joint ventures fail because of wrong choice of partners. It is recommended to look for partners with common goals and interests. Choosing the right partner is the only way a joint venture can succeed and failure to do so can only lead to failure of the business. In fact, experts confirm more than 50% of business fails because of having wrong partners in the joint venture. Looking at Lucky MT, it can be assumed that the partners were not on the same page. If indeed they were on the same page, then the joint venture would have proceeded without any conflict of interests. The occurrences indicate one of the partners was not right. However, it does not mean that incompatible partners cannot workout a joint venture. The partners of the Lucky MT; Medtech and Telnet seem like compatible partners in the joint venture. For the business to succeed, it would have been better to approach the business differently. Business experts like Stephen A Toris (2007) feel that divergence opinions and interests among partners in a joint venture are caused by individual interests among the board members. In this case, if the board chairman of one of the companies is not happy with the joint venture, they are likely to have cold shoulders towards everything the other company board proposes. In that case, Stephen claims that the best way of going around such issues is having an independent advisory board that had nothing to gain in the company. Such a board should be remunerated basing on consultations done or after every month as per the agreement drafted between the parties. Recommendations According to Stephen A Toris (2007), company boards are very necessary and any company can do without a board. The idea is to have the original owners of the company discuss the issues they have one on one and agree on the way forward as the partners. In fact, it can be confirmed the goals and objectives of the board members are very different from those of the owners. In that case, there are chances that boards may make wrong decisions which could significantly affect the owners and the company. However, other experts believe that boards are essential to companies that would like to succeed in what they do. However, for this plan to work, a company has to get the best and well experienced board members who have the interests of the company at heart. At the same time, such companies must have policies and regulations governing everything that has to be done. Companies that decide to work with boards must be very careful drafting the rules, policies and the roles of each person in the board and in the company. Not having a clear concise plan for running the company could be detrimental. At the same time, the owners of the companies must be involved in all the decisions made by the board (Deloitte, 2012). Although the parent companies settled on international joint venture with an international company, it would have been better for the companies to settle for establishing an entire company overseas. This way, the companies would feel they have contributed much and would have no alternative other than be committed to the joint venture. In addition, the parent companies had to make changes in the way they run the joint venture. Apart from making the joint venture independent, the companies ought to have made proper rules and regulations governing their operations. Discussions had to be made between the two companies to determine the common goals and objectives of the joint venture (Gallardo et al, 2012). As stated above, the individual owners of the joint venture may have varying goals and opinions. Discussions can assist the parent companies to negotiate how to operate the joint venture and for how long. Looking at the current scenario in the case study, one parent company was uncomfortable while the other was very comfortable with the joint venture and proper negotiations would have confirmed that maybe one company wanted to do the business for a limited period of time. In that case, the companies would have decided on a proper exit strategy. Experts caution parent companies to decide on the best ways to exit in such a venture otherwise the parent companies may decide to exit prematurely which could be extremely expensive for the parent companies (Gallardo et al, 2012). To avoid the conflict of interest in the future, Wasserman (2003) advices the parent companies management to think around operation related, strategy related and relationship related challenges during the formation of the joint venture and discuss them. According to this author, discussing the potential challenges and getting the solutions before the formation of the company allows the two management to be on the same page despite their different perspectives and opinions. This strategy allows the companies to work in harmony and the joint venture formed is usually long lasting compared to other joint ventures which collapse within half a decade after the launch. Yan and Luo (2001) confirm the formation process if the most important and critical for the joint venture formation. These authors caution companies that look forward to form joint ventures in future to take the process of formation very seriously. Joint ventures are very complex and have to be given the attention they deserve to be successful. Conclusion Lucky MT, a joint venture established by two companies in different fields got a share of challenges operating in the foreign country. The company profitability started to decline and competition from other companies in the same field became stiffer. The issues emerged from diverging interests in the company which could have been caused by lack of common vision or achievement of individual partner goals and objectives. These challenges would have been avoided with proper policies outlining the roles of each of the partners, the common targets of the joint venture partners, proper outsourcing strategies, recruitment of personnel and recruitment of an impartial manager to head the joint venture. At the same time, the founding partners had an obligation to do better research on the market dynamics to determine the best place to set up the joint venture company or where to outsource the services to. 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