International Business Strategy of Chrysler and Daimler - Assignment Example

International Business Strategy Introduction International Joint ventures (IJVs) have significantly higher failure rates; there is a long list of failed joint ventures such as Daimler Benz/Chrysler, Alcatel/Lucent, AOL/Time Warner, HP/Compaq, Novell/WordPerfect, JDS Uniphase/SDL, Borland/Ashton Tate, National Semiconductor/Fairchild Semiconductor, Excite/@Home. In one of the study, between 1972 and 1976, over 90 ventures failed in Japan alone. In many of these ventures, many large companies from the US such as Sterling Drug, Avis, TRW were involved. As per the Harvard Business School study, almost 30% of the 1100 joint ventures shaped before 1967 between one of the US firm and the company from the other developed nation did not survive largely due to organisational or strategic changes made by the management (Killing, 1982). The paper attempts to explore some key reasons behind the failure of large IJVs; at the same, it will also find the specific success factors of IJVS in emerging economies. Organisational Cultural Difference – A Dominant Cause of Failure Cultural difference between partners is considered one of the principal reasons that come in the way to the success of joint ventures. Before forming a joint venture, the companies do not conduct compatibility analysis. Most of the time, their management style differs from each other. One could be more decentralised in its decision making process while the other partner believes in more control and does not provide enough freedom to its line staff. Even after forming a joint venture, no efforts are made to create a suitable mix among the staff making the joint venture nonfunctioning. Farkas and Avny (2003) argue, "Difference in organizational culture is the reason for performance gaps in joint ventures rather than national culture differences. They also state, "The influence of cultural difference on the performance of international joint ventures is indirect, but highly influenced by the level of trust between its partners”. The researchers studied those joint ventures where one of the partners hailed from Israel. Cultural differences between western multinational enterprises and Japanese companies have also been determined as the factor behind the failures of their joint ventures (Brown et al. 1989). Chrysler and Daimler IJV– a glaring Example of Cultural Mismatch Chryslers merger with Daimler is worth mentioning here that could not evoke successful outcomes due to cultural mismatch between them. The Chrysler division was a profitable division prior to merger but its performance deteriorated after the merger. Management undertook several layoffs at Chrysler following the merger that was never anticipated in the beginning. Daimler-Benz favored a structured and formal management style against Chryslers freewheeling style of working. This culminated into a steep decline in employee satisfaction; eventually, a large number of senior executives departed from the company with declining performance year after year. Daimler underestimated the cultural importance at the Chrysler division and had to later hive off the division completely (Ojha, 2008). Variety of other reasons can be put forward on the failure of joint ventures. Quite often, pursuing short-term versus long-term goals itself becomes a bone of contention. When one of the partner insists on short-term objectives in contrast to a long-term objectives strategised by other partner, difficulty begins in the operations and deployment of resources. At times, partners fail to reach a consensus on priorities and that becomes a reason of break off. In the absence of clear thinking, the joint venture cannot respond to external environment effectively (Killing, 1982). IJV may collapse even if the market potential is over estimated for the joint venture company or capital requirement is underestimated. ICIs joint venture with a Spanish firm failed because the Spanish firm could not raise their contribution when the joint venture needed additional capital; though both the firms were quite compatible (Yan and Luo, 2001). Key Success Factors of International Joint Ventures in Emerging Economies Yan and Luo (2001) argue that many of the joint ventures in emerging economies are formed due to government policies in host country. In emerging economies, governments insist on large foreign entities to make joint ventures with local partners instead of going for wholly owned subsidiaries. Majority of joint ventures in China in 80s and 90s were the result of the then government policy that insisted at least 25 percent equity holding from a foreigner partner. For foreign firms, getting hold on overseas market is the main reason to form joint ventures. Yan and Luo (2001) argue that compatibility between the partners is important in four areas: Organisational capability, strategy, culture, and financial strengths. Firms form joint ventures essentially to increase their market share and keep ahead of competition in an era of globalisation. When a multinational wants to operate in other countries, it would be in search of a suitable local partner that can safeguard the new venture from political risks by complying regulatory requirements of the host country. Partner Commitment and Mutual Trust – Significantly Important Zheng and Larimo (2010) argue that China in Asia and Finland as one of the Nordic countries are culturally quite diverse; however, nine joint ventures were established in China between the companies of these nations. The purpose behind the formation of IJVs was to increase market share and to reduce costs. Out of these nine IJVs eight joint ventures have survived over ten years. All the IJVs were related to industrial products. The success factors such as partner commitment, high level of trust, mutual cooperation not only between partners but between local and foreign governments were crucial among many other things. The ventures were considered successful in their objective assessments such as return on investment (ROI) criteria as well as on subjective measurements such as market share and market position. The lot of learning has gone in recent years while forming international joint ventures. For example, Corning, a large US based multinational, has formed over fifty joint ventures and majority of them have been successful. Their joint venture with Samsung, a Korean Giant in consumer electronics, was aimed at expanding television production and to increase its market share in Asia. Corning achieved a major market share in Asia through Samsung with sales of over $500 million in 1996. According to James Houghton, the CEO of Corning, there are four factors that contribute to the success of joint venture: interpartner trust, compatible contributions, business opportunity, the well-defined scope behind the venture to avoid conflicting situation, an autonomous team to conduct a detailed assessment of both the partners (Yan and Luo, 2001). Control Mechanism at Place in IJVs in Vietnam Cao Minh Tri (2012) discovers four control mechanisms behind success of IJVs in Vietnam that include result-control, action-control and personnel-control mechanisms. The researcher states that at least one control mechanism at a high level is necessary for success of IJVs though no control mechanism is necessary at a lower level. Post Liberalisation Era in Emerging Economies Dictates Stability to Joint Ventures India began with free market economy in 1991 and with that came the huge number of joint ventures between large corporation from the developed world and local firms. Kale and Anand (2001) argue that there is a correlation between economic liberalization and IJV stability. IJVs formed before 1991, a pre-liberalized era, met with more failures than the IJVs formed in the post- liberalization era. The factors that worked in success of joint ventures were mostly mutual trust between the partners and the factors that were seen complimentary to each other. Kale and Anand (2001) emphasise, "State of liberalization of the host country economy at the time of IJV founding is an important environmental dimension that is likely to impact its future stability" (4). Liberalisation tends to alter strategies of foreign partner and they inclined to integrate local operations with their global strategy with regards to pricing, product development, and brand creation. When local partners resist such move, joint ventures break off. Researchers conclude that post-liberalisation era will provide more stability to IJVs. Authors also conclude, "High complementarity of partner contributions is an important pre-requisite for IJV survival. Resource complementarity between partners influences them to remain committed to their joint relationship" (Kale & Anand, 2001 p17). They also discover that partners with differences in their learning intent or ability may also lead to instability in joint venture. IJVs with European partners exhibit much lesser probability of termination when compared with IJVs with Japanese partners in emerging economies. Conclusion Joint ventures are done to bring synergy in the operations so as to increase overall productivity and reduce the cost of the organization. However, often it does not materialise due to several intangible factors such as cultural mismatch, differences in vision, diverse short-term and long-term objectives. The issue of cultural mismatch is most prominent among the reasons for joint venture failures, especially when both the organisations belong to developed economies and control sizeable market share. In emerging economies, it has been observed that post liberalised period exhibit more stability in joint ventures. However, mutual trust for each other, learning ability of both the partners and resource complementariness provide strength to the joint ventures making them last longer. References Brown, L. T., Rugman, A. M. Verbeke, A. (1989). Japanese Joint Ventures with Western Multinationals: Synthesising the Economic and Cultural Explanations of Failure. Asia Pacific Journal of Management. 6(2). 225-242 Cao Minh Tri, (2012) "Success predictor for international joint ventures in Vietnam", International Journal of Emerging Markets, Vol. 7(1).72 - 85 Farkas, F. and Avny, G. (2003). Cross-Cultural Issues of International Joint Ventures: A Viewpoint from Israel. [Online] Accessed 1 April 2014 Kale, P., Anand, J. (2001). International Joint Venture Stability in Emerging Markets. [Online] Accessed 1 April 2014 Killing, P. (1982). How to Make a Global Joint Venture Work. Harvard Business Review. [Online] Accessed 1 April 2014 Ojha, N. (2008). Failure Mergers. JurisOnline.in. [Online] Accessed 1 April 2014 Yan, Aimin and Luo, Yadong (2001). International Joint Ventures: Theory and Practice. M.E. Sharpe, Inc. New York. Zheng, X., Larimo, J. (2010). Identifying Key Success Factors for International Joint Ventures in China: A Foreign Parent Perspective from Finnish Firms. [Online] Accessed 1 April 2014 http://books.google.co.in/books?id=eZQ9hTrht2AC&pg=PA37&lpg=PA37&dq=The+partner+selection+process+in+international+joint+ventures.&source=bl&ots=5O-sjvcJdM&sig=2keec1W0yaKGteZI2BLL6jmpxO8&hl=en&sa=X&ei=XE05U92uKYeLrQfQ8YGYCw&ved=0CDgQ6AEwAQ#v=onepage&q=The%20partner%20selection%20process%20in%20international%20joint%20ventures.&f=false Read More