EM-CNI Joint Venture Collaboration - Research Paper Example

EM-CNI JOINT VENTURE COLLABORATION Introduction Today’s massive worldwide convergence of industries and markets has forced firms to use their fullestpotential and resources to be able to survive. To be successful is an almost vertical climb in the steep competition. There are many reasons why collaborations have to occur; external factors are one of them. In the world of globalization, firms have to merge, consolidate, or acquire because of unavoidable occurrences. For example, a firm has to establish a branch office in a country whose laws and other environmental factors prohibit a smooth flow of business. The only chance is to look for a local firm and abide by the laws of that country. Moreover, aside from that country’s culture and other hindrances, the firm has to proceed with the plans. There has to be an effective planning or analysis of the target company’s business practices, staff, skills, structure or organization design, sources of core competencies, and its range of tangible and intangible resources for growth. These targets should be in line with the objectives for collaboration, and the question why the need for collaboration. The best global growth firms simply cannot sprint past their competitors using a single strategy. The world is far too complex and fast-changing for any old-fashioned static strategy to work. Thus to be successful in any collaboration efforts should be accompanied with proper choice of composite strategy. To most effectively profit from the joint venture, we must be able to link the key set of dynamic strategies available for the firm. We have to form a management to exploit the potentials in this collaboration effort at the same time driving forward all the other alternatives. Most collaborations underperform because top managers fail to consider the specific steps required to integrate an acquisition into their company or analyze how they will maximize their joint potential. On the other hand, poorly planned and badly executed collaboration efforts or integration creates fear in the company, or anger and uncertainty among the employees and managers. They need to be informed and oriented – that the collaboration is good for business, or that this could result to more gains and resources for the company. They need someone to want them and to reestablish a trusting bond. The firm can use a strategy to attract a successful collaboration and top talents in the company who are often so anxious to help in the process of collaboration. We have stated in this introduction the reasons and objectives for firms to form or go into collaboration, or whatever kind of collaboration that they want to apply in their firms in the midst of the intensive globalization and fast-paced communication that businesses and organizations are enjoying at the moment. When we say enjoying, we also have to bear in mind the existing global economic crisis which has been occurring in this so-called Information technology craze and the Internet. Let us focus, first and foremost, on the company in question – CNI. This company has to form a collaboration, so that the objective here is how and who to collaborate with. There are facts and allegations to talk about in the background and the literature. Background In the course of the study and formulation of this paper, the different module lessons can be implemented. However, we also focused on the different plans, such as the strategic, operational, and financial plans to be implemented on the company that we have selected to collaborate with CNI. The firm’s joint ventures, strategic alliances, franchising, and licensing agreements have to be carefully studied because they often multiply the resources and problems. This collaboration can accelerate the forward momentum of the company and the benefits of such partnerships are often derived much faster, cheaper, easier, more profitably, and without debilitating conflict and turmoil when compared to a typical merger or acquisition. In today’s technologically fast-changing business environment, the windows of opportunity for strategic attacks often are open only briefly and close quickly. More importantly, if we do not exploit an opportunity, other competitors will. This may turn the table, giving them additional resources, time, market share, and profits. However, we have the technology, Information Technology tools, the Internet, and other business innovation tools that we can avail of in the collaboration process. Collaboration is not new in the world of globalization. Businesses and organizations are merging and forming alliances to further their aims. And as we said earlier, if we don’t do it rightly and quickly, our competitors will because they also have those tools at their easy reach. Our primary objective is to acquire the government licence from Amazonia. This is a long term project that requires a lot of planning. But the rewards of a successful collaboration can be enormous in Amazonia. When the firm wins the application, we are rewarded with a major source of competitive advantage. We will also be strengthened financially, organizationally, and reputationally while our competitors are weakened. Moreover, these competitors are watching and doing something to get the leverage. Financial benefits can come sooner, but we have to take the financial side carefully and this has to be forecasted in a ten-year’s time. We can virtually create a new vital core competency with financial, managerial, and reputational benefits that can reverberate into the future of the organization. As it is plainly stated in the module and case studies, a collaboration is a must for CNI, but the type of collaboration that is best suited in this situation has to be decided. It is in the best interest of CNI to agree on a joint venture with Euromanometers Plc (EM) – this is a company based in the UK and has recently become a Plc. All parameters point to EM; CNI must choose this company for a joint venture, the stakes are high, the advantages surpass the disadvantages. Weighing further other parameters may point to HC as not favorable for CNI. The situations, present and future, will be enumerated here. A joint venture agreement is favorable for Amazonia and the stakeholders. Historically, joint ventures have driven accelerated corporate growth in sales, profit, and cash flow to enable quick capture of new markets or create a host of new products of services. They have been crucial to launch old trading firms, joint stock companies, factories, and in big projects such as mines and railroads, etc . But in our case study, a joint venture company will be used to help CNI cope with the environmental factors, the internal and external factors in conducting business in Amazonia, particularly the manufacture of medical equipment using imported material to be integrated with locally-made products. We are focused on the approval of a government licence along with this collaboration. The move towards local assembly or manufacture will inevitably mean prohibitively high import duties on fully manufactured equipment, and as a further complication it is understood that Amazonia has decided and announced that only one Government Licence would be issued for the assembly or manufacture of this particular type of medical equipment which will be used for existing hospitals and the many others planned to be built. According to the investigation of the management team commissioned by CNI, information provided by the Ministry of Trade and Industry revealed that assembly operations with over 65% local content will have a 5% import duty, compared with 40% duty for fully manufactured items, or for components for assembly operations which do not meet the minimum level. “Local content” represents the total “added value” in Amazonia. One important factor to consider is that Amazonia has a shortage of hard currency and the government has made it a point that foreign exchange outflows must be balanced by equivalent export value. Some forecasts made by the investigating team also revealed that there would be a great need of hospital buildings in the coming years, and each hospital would require at least one set of equipment, and additional sets would be required for the larger hospitals which can make up about 25% of the total. Additional reserve of the prospective hospital equipment must also be available since the average life of the equipment is 8-10 years. In other words, the need at present, and subsequently in the future, surpasses the demand. CNI has to grasp this opportunity but has to answer the big responsibility in case it attains the licence. EUROMANOMETERS Plc (EM) Tacking a quick look at EM’s background as a manufacturer/exporter of medical equipment which is badly needed for the hospitals in Amazonia can give light to the choice that we have made. EM can answer to the call for CNI collaboration; its primary task is to build medical equipment as stated above, and to support the requirement for an export programme that is in line with the Amazonia government’s regulation of a balance foreign exchange in order to cover up the dollar outflow because then when CNI would be manufacturing the medical equipment, it would need imported material. CNI has no experience of exporting sophisticated medical equipment, but EM has. EM is the best choice for a partner to take the major responsibility for generating the necessary export revenue, to balance the foreign exchange outflow. The collaboration – a joint venture company for EM and CNI – as we see it is a way to quickly leverage and fully utilize both organizations’ strengths to the full benefit of CNI, and the Amazonia people. Selecting EM is shooting many birds in one shot – it can help in the manufacture and export requirements of CNI, a major requirement of the Amazonia government in approving the licence. EM is a UK based Plc, family owned, and whose specialty is the design and manufacture of highly specialized medical equipment for measuring and recording blood pressure, heart rate and other functions, which can answer to the needs of CNI. In other words, this is what CNI has been looking for. From the data gathered by the investigating team, EM has a turnover of £3,750,000 and cost sales of £2,900,000, a capital of £2,000,000, a profit of 380,000 after tax, and 42 employees. Although these figures are a bit lower than its closest rival HC, EM still performs well; meaning, it is not the figures but how its performance that matters in the success of the collaboration. To summarize, EM has a good reputation; its products are less complex, but with quality and good performance. Nevertheless, there are other competitors that can answer to CNI’s call for collaboration; EM is not alone. But EM products are of various ranges and with quality, from semi-portable units to complex ones. Their competitors include a multinational company based in North America also manufacturing medical equipment but has recently been in a predicament involving finances, and the other one is a Swiss company. It is said that EM’s products are technically sophisticated but competitive in price. The management is well motivated, continuously expanding and improving their products. They also have an impressive international network of distributors and customers from various strategic locations worldwide. They have unique and advanced manufacturing processes with worldwide patent protection still effective up to nine years. One important fact about EM is that it has a long-standing and very successful relationship with CNI, giving it an edge over its rivals. CNI is able to sell in Amazonia the built-in operating theatre model under CNI’s own brand name. In other words, EM and CNI have an existing partnership although it is not yet official and has not gone through the formalities of a collaboration. Their existing collaboration is a de facto type of existence in which both enjoy the benefits of the collaboration. EM managers and employees will find it comfortable working with a former partner CNI, and so do CNI managers and employees. They will reciprocate each other; they will know how to work as a team. Organizational and national cultures will not be a hindrance in the collaboration. Cultural Aspects Cooperation between partners from radically different cultures is a major challenge. For example, Americans tend to be individualistic and, generally, not group-oriented. Even in joint ventures between the United States and Britain, in which, as the saying goes, “Two cultures are separated by the same language,” the issue of cultural differences can be quite remarkable. However, cultural differences are not always a liability. A danger to international joint ventures, however, is that one partner may unilaterally impose its own cultural values and norms on the other partner without considering the latter’s cultural attributes. Or a partner may inadvertently relinquish its unique culture and strategic strengths to the other firm. In addition to the national culture, every company has its unique corporate culture. Potential joint venture partners need to assess and ascertain how well they can manage their differences in organizational culture, because the achievement of cultural synergy is a key factor in the building of mutual trust, which in turn contributes to venture success. CNI therefore needs to take a close look at compatibility in organizational and management practices with its potential partner EM. And since a former partnership or collaboration, though ‘informal’ as it is, has already taken place, this may not be a big problem for the Joint Venture Company that the two firms can form. HELVETICOEUR S.A. (HC) On the other hand HELVETICOEUR S.A. (HC) is in a close race in the competition with EM for CNI’s pick as partner in the collaboration. In contrast to EM, HC is a Swiss company, respected for its products which are specialized medical equipment, similar in concept and function with EM’s, and also has an excellent international reputation for quality and performance. HC products are a bit expensive because they are manufactured in Switzerland which has one of the highest labour rates in Europe. EM’s patents have constrained HC’s quest to re-design its products. Nevertheless, HC has higher financial statistics than EM. It has a turnover of £12,600,000, and cost of sales of £10,080,000, which is far higher than EM’s. Its profit after tax is 1,032,000, and with 45 employees. Its main product selling price is £625,000, much higher than EM’s £250,000. This makes EM affordable for CNI. And as mentioned, it is not the figures but the performance that has to be taken into consideration. The Joint Venture Joint venture is a key tool of global consolidation. For over three centuries, joint ventures between firms have driven accelerated corporate growth in sales profit, and cash flow to enable quick capture of new markets or create a host of new products or services (Grubb and Lamb, 2000, p. 76). The unique features of international joint ventures have made this organizational form both interesting and challenging. Since joint venturing is a process that involves multiple facets and dynamic, previous research has identified several key areas of study. Parkhe (1993, cited in Yan and Luo, 2001, p. 6) identified four major areas of research on international joint ventures: the motives for venture formation, partner selection, governance and control, and joint venture performance and stability. According to Parkhe, the various motives for creating international joint ventures have extensively, if not systematically, explored. The choice of organizational structure, alliance structure design, and dynamic evolution of the cooperative relationship represent the three major areas awaiting deeper theoretical insights” (p. 233, cited in Yan and Luo, 2001, p. 7). There are numerous strategic reasons for forming joint ventures. Harrigan (1988) argues that “joint ventures can (1) exacerbate competition, (2) stabilize profit levels, or (3) precipitate structural changes in vertical integration, technological scale, or other industry traits” (Yan and Luo, 2001, p. 13). Different industry characteristics, (e.g. demand growth, market attractiveness, market standardization, and uncertainty) and competitor traits affect the strategic use of joint ventures. Many firms form joint ventures to deter entry or erode competitors’ strategic positions. Vickers (1985, cited in Yan and Luo, 2001, p. 13) shows that joint ventures are an effective mechanism to guarantee the entry-deferring investment. Vernon (1983, cited in Yan and Luo, p. 13) also argues that joint ventures are a form of defensive investment by which multinationals hedge against strategic uncertainty, especially in industries of moderate concentration where collusion is difficult to achieve despite the benefits of coordinating the interdependence among firms. It is widely assumed that firms establish joint ventures only when the perceived additional benefits from joint venturing outweigh expected extra costs (Beamish and Banks 1987; Geringer 1991, cited in Yan and Luo, 2001, p. 20). The additional benefits will be added if the selection and retention of a collaborative partner can provide the complementary skills, competencies, and capabilities that assist the focal firm in accomplishing its strategic objectives (Buckley and Casson 1988; Hamel 1991; Harrigan 1985, cited in Yan and Luo, 2001, p. 21). If the joint venture is successful a majority partner may try to force the minority partner out of the venture. When this is not possible, attempts are made to dominate and determine the major decisions to be made without regard to the interest of minority owners. Then if it is a failure, each partner seeks to extract the utmost benefit with the minimum investment and effort. (Wolf, 2000 p. 5) What will happen to the joint venture of CNI and EM is for the future to behold. Meanwhile, our goal is to make this successful. As stressed earlier, this is a Joint Venture Company with a minority shareholding, CNI having the big share and EM supplying technology, expertise, and some other imported materials. CNI will provide the local materials, technology, and expertise. Amazonia will provide the local labour and materials. Amazonia has lower material costs – it has 10-15% cheaper on average than those in Western Europe, while labour costs are 15-25% lower than in Western Europe. 33% consists of indirect labour in Amazonia. The appropriate equity split could be 70-30 or 80-20 equity in favor of CNI, but a 60-40% can also be possible. How do we integrate EM to CNI? We can implement a full integration. In this process, we join together 100 percent of the two firm’s systems, assets, practices, people, organization designs, and business units into one united organization. It is the choice of most acquirers and entered into about the organizational energy, focus, and total company-wide commitment to make it successful (Grubb and Lamb, 2000, p. 93). But full integration is not possible for CNI. The firm is only looking at the near future, possibly ten years, the contract’s inclusive period, that it also when the necessary medical equipment shall have been made available and supplied to the hospitals in Amazonia. There are however many factors that should be given attention. Some questions have to be asked by the CNI management, for example: What are the differences between the two companies in organizational structure and business strategy? Are they centralized or decentralized in decision making? Are both managements flexible and committed to overcoming potential conflict? How compatible are their core values and philosophies?’ On the other hand, JVC might simply be a supplier of finished products but these medical products have to be manufactured inside Amazonia, using Amazonia labour which costs lower than outside the country. Planning stage for the collaboration of CNI and EM includes Strategic Planning, Tactical Planning, Financial Planning and Operational Planning. FINANCIAL PLANNING Financial planning is one of the most important aspects of the collaboration. This is to evaluate and construct a detailed plan that will envelope the strategic/tactical plan, compare the plan with the alternative options, and ensure that the collaboration is financially and commercially viable. Moreover, apart from the financial planning, we also have to consider four broad yet fundamental factors in choosing an appropriate partner which concern the cultural, strategic, organizational, and financial traits of the partners. The successful configuration of these factors requires not only an appropriate alignment of an international joint venture’s organizational capabilities to the external industry or market and its strategic goals, but also a proper match between one partner’s competitive advantages with the other’s distinctive operational competencies. These operational competencies reflect on the firms’ operation-related attributes such as market share, industrial experience, and relationship with the local government. These can constitute for the venture’s success in exploring the new market opportunities and exploiting product potentials in the new environment in Amazonia. We have stated this in our analysis of the two companies, EM and HC. The environmental factors have been analysed and given proper considerations. All parameters were enumerated and we concluded that EM is the best choice for a collaboration. This will form a joint venture company with CNI. Important inputs to the financial planning No firm can invest its resources into a collaboration effort without significant assurances from CNI that it can gain much from the project. First CNI has to make assurances that EM can make profits out of the collaboration. The assurances may not be explicit but of course the two management teams can work it out and produce a one indivisible and coherent management team to work out for the years ahead. There is therefore a need for involvement from relevant stakeholders and clear articulation of a win-win formula or outcome. Some other questions will have to be asked to give focus on the project. How can a common and accepted agreement be reached for defining and implementing these efforts among all parties involved? What are the strategies that can achieve these outcomes and keep them in focus throughout the implementation of the collaboration? Empirical evidence suggests that the working relationship between the two groups of managers at the joint venture, each nominated by and thus representing a different parent, is also very critical to the venture’s operation, creating significant implications for interpartner trust as well as the venture’s performance (Yan & Luo, 2001, p. 5). As to laws and regulations of the host country, the joint venture has to abide with these laws, naturally. They have to consider the various laws and regulations that maybe applicable to the business of the JV. The most common areas of concern are the laws, rules, and regulations governing enterprises, labor, health, environment, capital markets, and securities. Understanding and complying with all these laws can be an expensive and time-consuming experience. (Gutterman, 2002, p. 12) Spreadsheet Analysis This section of the paper will analyse the different inputs of the stakeholders: JVC, EM and CNI. Both company profiles are presumed exposed in the open for both management – of EM and CNI – to study carefully in the four stages of planning: strategic, tactical, financial, and operational planning. Equity joint ventures are legally and economically separate organizational entities created by two or more parent organizations that collectively invest financial as well as other resources to pursue certain objective (Yan and Luo 2001, p. 3). As we can see, the spreadsheet reveals a comparable financial forecast of up to the year 2020, or a ten-year financial forecast. We are speaking of equity joint venture of two independent firms EM and CNI. A collaboration project involving CNI and EM, with JVC at the forefront can produce a sales volume of 8 inside Amazonia and 6 for export – this is speaking in terms of units or sets of medical equipment that the collaboration can manufacture. For a three-year period, from 2011 to 2013, the sales volume of manufactured units is regular, i.e. 8 for Amazonia and 6 for export, or outside Amazonia; whilst for the Joint Venture Company, from 2014 to 2017, again the sales volume is similar (8-6, 8- 6), until it reaches 2020 when the collaboration is able to supply to partners, i.e. from 2018-2020. To summarize the sales volume, for a ten-year period the collaboration can produce 80 for Amazonia and 60 for export. As to the product cost structure for the assembly in Amazonia, we have from the spreadsheet, imported material is 85.9 (CIF and to included Duty); local materials is 27, local labour 12, local overhead 70, and JVC profit is 25, for a total of 220. The CNI price to government of Amazonia is £275,000. The original price of EM to CNI is £250,000. The component costs & pricing for EM is as follows: Total Material cost/ unit is 99; local material in Amazonia is 29.70; material cost to JVC is 69.30, CIF charges is 1.73, EM Markup (% total cost) is 7.10, CIF Price to JVC is 78.14 and the % Import Duty on components is 0.1. We also have the CNI Profitability Analysis as follows: Unit Sales for the domestic market in Amazonia is 4400 or 82.3%; rent from JVC is 800 or 15.0%, the JVC profit share is 143 or 2.7%. The total profitability is 5343. JVC has a profit share of 143 to EM and CNI, which is quite fair in the coming years. Overall profitability includes, for CNI – 5343, EM – 4496, and for JVC – 287. This profitability has a forex balance in 5 years of -549, and in 10 years -197, all in £ Sterling. The finished product pricing is £275000, JVC to the Amazonia Government, and £250000 for export. The overall profitability in 10 years time: CNI 3888, JVC 6177, and EM 5932. Transaction Costs We have to comply with regulations and laws of Amazonia. But there are particular criterion for choosing among the alternative governance structures, according to Williamson (1991, cited in Yan and Luo, 2001, p. 9) which is minimization of transaction costs. Transacting costs are negotiating, writing, monitoring, and enforcement costs that have to be borne to allow an exchange between two parties to take place. The sources of these costs are the transaction difficulties that may be present in the exchange. OPERATIONAL PLANNING The spreadsheet forecasted a ten-year comparable financial situation with EM and CNI at the forefront but with JVC or Joint Venture Company also taking part in the operations. This has to be a ten-year operation and certainly the contract has to expire by that time. When all the necessary medical equipment have been delivered to the hospitals, i.e. present and future hospitals, the company may not be effective anymore and have to get out of Amazonia, or continue the same collaboration, but the operations may differ. It may not focus on plans of more exports outside of Amazonia. This can provide more income both for the collaboration, jobs for the local employees and managers, and dollar earnings for Amazonia. CONCLUSION We have discussed in this paper the various methods of collaboration or integration as practiced by international firms as strategic methods in this revolutionized world of business where one organization on side of the globe can get connected to other firms or organizations in the other end of the globe. This is a fast-phased world of the Internet and Information Technology, and transportation faster than the speed of sound. The firm EM was recommended to collaborate with CNI in a joint venture agreement for the purpose of manufacturing medical equipment to be supplied to the hospitals in Amazonia. The medical equipment will be produced through a sharing of equity method between EM and CNI firms, and the contract will be in a ten-year duration, or until the time when all the hospitals of Amazonia will have been supplied with those equipment. References Grubb, T. M. and Lamb, R. B., 2000. Capitalize on Merger Chaos. New York: The Free Press. Gutterman, A. S., 2002. International Joint Ventures: How to Negotiate, Establish and Manage an International Joint Venture. New York: World Trade Press. Wolf, R. C. and Wolf, M., 2000. Effective International Joint Venture Management: Practical Legal Insights. New York: M.E. Sharp, Inc. Yan, A. and Luo, Y., 2001. International Joint Ventures: Theory and Practice. New York: M. E. Sharpe, Inc. Read More