Expansion through Cooperation • Mergers and Acquisitions • Joint Ventures • Strategic Alliances:
Expansion through Cooperation
Expansion through cooperation refers to the mutual cooperation between organizations belonging to the same industry to achieve a shared objective. For example, if an organization works in cooperation with other organizations, it can establish a favorable position in the industry relative to its competitors. The cooperation strategies available to organizations are as follows:
- Mergers and Acquisitions
- Joint Ventures
- Strategic Alliances
Let’s discuss each of these strategies in detail.
Mergers and Acquisitions
Mergers and acquisitions have become popular strategies in the last two decades to expand the scope of business for an organization.
A merger can be defined as the combination of two or more organizations, in which both the organizations are dissolved and their assets and liabilities are combined to form a new business entity. It is also referred as an agreement in which one organization obtains the assets and liabilities of the other in exchange for shares or cash. Thus, in mergers, organizations pool their resources together to create competitive advantage.
An acquisition refers to the process of gaining partial or full control of one organization by another. In most of cases, acquisitions are unfriendly in nature as one organization tries to take over another organization by adopting hostile measures, which may not be in the interest of the acquired organization.
The main reason behind mergers and acquisitions is the desire of organizations to increase their market power and gain synergy.
There are various types of mergers that help in expanding the size of organizations. These are briefly explained in the following points:
- Take place when two or more organizations in the same business activity merge. The merger results in a larger organization and large-scale operations for the merged organization. Organizations may merge horizontally by sharing their resources and skills. For example, an organization in computer hardware manufacturing may merge with the organization having the same business.
- Refer to a merger between two or more organizations having different stages of business in the same industry. For instance, organization A, which is involved in the manufacturing of certain products, merges with organization B, which sells the products of organization A. In such a case, it is the vertical merger that has taken place between the two organizations. The reasons for vertical mergers are reducing the costs of communication, coordinating production, and better planning for inventory and production.
- Refer to a combination of two or more related organizations with similar production or distribution technologies. For example- a merger between the motorcycle manufacturer and a car manufacturer.
- Imply a situation when two or more unrelated organizations merge horizontally or vertically. For example, the merger of a fast-food outlet with a cloth manufacturing organization is a conglomerate merger.
Purpose of Mergers and acquisitions
Mergers and acquisitions happen to achieve the following results:
- Increase the value of the organization’s stock
- Increase the growth rate by making wise investments
- Balance and diversifying the product lines
- Reduce competition
- Avail tax concessions and benefits
- Acquire competence and capabilities
- Enter new markets for increasing market share
Joint venture can be defined as a creation of an entity by combining two or more organizations that want to attain similar objectives for a specific time period. In other words, it is a cooperative business agreement between two organizations to fulfill their mutual needs.
The joint venture strategy allows organizations to share their technological skills and specific knowledge; and represents a potential source for the growth of organizations. In addition, it is very useful for organizations entering the international market.
An organization can enter into a joint venture in the following situations:
- When it is uneconomical for an organization to perform an activity as a standalone organization
- When the risk of the business must be shared and reduced for the participating organizations.
- When the distinctive competence of the organizations can be brought together.
- When setting an independent organization requires surmounting hurdles, such as tariffs and import quota.
Why form a joint venture?
There are lots of reasons why your business may consider entering into a joint venture with other business partners, including:
- New product development– Companies and individuals can bring different levels of expertise and skills to a joint venture that can aid the development of products and services that otherwise would be difficult for a company to create on its own. For example, an independent solicitor and a small accountancy firm might work together to create a new business specialising in tax affairs for business startups. Services or products created through such ventures can either be marketed by both business partners, or the joint venture may operate independently with its own management team and marketing. Joint ventures such as these can potentially broaden a customer base and result in additional revenue.
- Expanding into new markets– Breaking into new markets, from new territories to new demographics such as the over 50s, can be difficult without being able to draw on businesses that have already established a presence in the target market. Joint ventures are often formed when an international business is looking to move into a local market. They will partner with a business offering local expertise in logistics, distribution or retail to establish a supply chain and route to market. Supermarkets often form joint ventures to set up new, local supermarket chains in new countries, such as Tesco creating a joint venture with China Resources Enterprise in China in 2014.
- Bundling products and services– Bundling one company’s products and services with those of a partner can create a single offering that better suits the needs of customers and delivers more value, making it more competitive. This can increase sales and gain market share at the expense of competitors.
- Partner endorsement– A less complicated type of joint venture, partner endorsement sees one business endorse and recommend the products and services of its joint venture partner. This is similar to an affiliate relationship, where revenue is shared on any referrals from one business to another.
- Shared marketing– Pooling resources such as marketing budgets can help a collection of smaller businesses access greater reach and more effective marketing channels than they could by themselves. Pooling resources on a larger campaign can benefit all parties.
- Co-sponsoring events– By spreading the cost of sponsoring an event with a joint venture partner, each company can get more bang for their buck. Smaller businesses can reap more exposure, publicity and customers leads by teaming up with a larger more well-known partner, giving more credibility to your business.
Joint venture advantages and disadvantages
Joint ventures can be complicated arrangements. While they offer strong advantages to businesses, they can be fraught with risk – from a lack of transparency and trust to culture clashes than can be a drain on resources and harm operations for both parent companies.
- Stronger together– Properly set up, the best joint ventures effectively leverage both parties’ assets and strengths, while diluting weaknesses. The result is a joint venture that brings the best of both worlds.
- Time limited– Joint ventures usually have a defined timeframe. Their temporary nature means it doesn’t tie businesses together for eternity, and exit clauses mean it can be simple to dissolve a joint venture if it isn’t working out.
- Diversification and scale– Joint ventures allow each partner to operate at a larger scale than possible individually. This can mean access to a larger market, more diverse product and service offerings, or more effective supply chains. It allows a business to move quickly into a new market without having to develop new products and services from scratch, reducing costs and time to market.
- Pooled risk– All businesses involved in the joint venture share a proportion of the risk, with all parties working to a shared goal. This can dilute the risk that an individual business would face by going it alone, and if the venture fails, means that sunk costs are shared between invested parties.
Businesses aren’t natural bedfellows. Most companies are geared towards competition, which can make working together a challenge.
- Culture clash– Many joint ventures flounder due to a clash of cultures, processes and approaches when two companies work together. Differing management skills and abilities, conflicting HR processes and workplace cultures can make it hard for joint ventures to successful mesh.
- Decision making– Trust is vital in any joint venture – which can make decision-making more difficult if both parties need to sign off decisions when there is a lack of trust. Poor decision-making and second-guessing the other party can lead to failure.
- Privacy and sharing information– A joint venture inevitably involves a degree of knowledge sharing that can mean a lack of control over your intellectual property. To ensure that trade secrets or other sensitive corporate information isn’t made public, ensure non-disclosure agreements are in place from the outset.
- Unequal commitment– Ideally a joint venture should be an all-for-one and one-for-all proposition. A lack of commitment from one of the partners can create an unbalanced joint venture.
Examples of joint ventures
Some of the examples of joint ventures are as follows:
- Balaji Telefilms Limited entered in a joint venture with Star Group Limited to create a television network of regional language general entertainment channels that target the South Indian market.
- Tata Tea has a joint venture with the Chinese state owned company, Zhejiang Tea Import & Export Company, which is the largest green tea exporter of China.
A strategic alliance is a mutual agreement between two or more organizations. According to Yoshino and Rangan, “A strategic alliance is a partnership between two or more organizations that unite to pursue a set of agreed upon goals but remain independent subsequent to the formation of the alliance to contribute and to share benefits on a continuing basis in one or more key strategic areas.”
Organizations enter into the strategic alliance with their suppliers or competitors to gain competitive advantage. These alliances enable organizations to enter new markets, obstruct competitors, and generate higher revenues. The benefits of strategic alliances are as follows:
- Help organizations to enter into new markets by forming partnership with other organizations
- Reduce the manufacturing costs by pooling resources to utilize them efficiendy
- Develop technological capabilities by sharing technological expertise
four types of strategic alliances,
There are four types of strategic alliances, which are discussed as follows:
- Pro-competitive Alliance: Involves the relationship between inter-industry alliances, such as manufacturers, suppliers, or distributors. These alliances offer the advantages of vertical integration.
- Non-competitive Alliance: Involves the intra-industry partnerships between non-competitive organizations. In non-competitive alliance, the areas of activities of organizations do not coincide with each other. Thus, there is no competition between them.
- Competitive Alliance: Refers to a partnership between two or more rival organizations. There can be intra-industry or inter-industry competitive alliance. Many foreign organizations enter into strategic alliance with local competitive organizations.
- Pre-competitive Alliance: Implies the partnership between two or more organizations from unrelated industries. This alliance is formed to work on different activities, such as development of new technology, new product, or new idea. Joint research and development activities are an example of pre-competitive alliance.
Examples of Strategic Alliance
A strategic alliance can be formed in different ways, depending upon the nature and motive of the alliance. Different strategic alliances are discussed as follows:
- Implies an alliance in which an organization (licenser) grants rights to its intangible property, such as patents, inventions, formula, design, and process, to another organization (licensee) for a specific time. The licenser receives fees from the licensee to use its property rights. In early 1960s, Xerox granted a license to Fuji-Xerox to manufacture and sell xerographic equipment in countries other than United States and Canada.
- Implies an alliance in which the production of goods is outsourced to some other organization. One organization decides the design and specifications but another organization does the production. For example, Nike follows the strategy of contract manufacturing, where it decides the designs, but the manufacturing of the product is outsourced to another organizations.
- Implies an alliance in which one organization takes the complete responsibility of setting up a new organization, starting from the planning of infrastructure to the training of personnel, on behalf of a client organization. After the completion of project, the newly set up organization is handed over to the client organization for starting the actual operations. These types of projects are called turnkey projects. For example, a contractor builds a hospital installed with high technology medical equipments and hands over the premises to the owner after completion.
- Refers to a long-term commitment in which one party (franchiser) sells its intangible property rights to other party (franchisee). In addition to selling property rights, the franchiser supports the franchisee in setting up the business and insists the franchisee to follow the rules and regulations made by the franchiser. As a result of this, the franchiser receives a royalty from the franchisee. For example, McDonald’s expands its business in foreign countries through franchising. McDonald’s has set certain rules and regulations that every franchisee is bound to follow to retain the outlet. This is done to maintain the brand image and product/service quality across nations, irrespective of geographical constraints.