PART III: AN OPEN RELATIONSHIP
“In the
world of personal relationships, an open relationship seems to offer a dazzling
chance to have your cake and eat it,” write Faelten et al. It is a state of
being together but independent of each other—friends with benefits.
This
relationship status means partnerships or joint ventures (JVs) in the corporate
world. A JV gives companies access to industries or markets otherwise out of
reach because they lack the necessary local or industry expertise, or the
appropriate funding and scale, among others.
Psion partners with Nokia, Ericsson and Motorola
Before the
Google’s Android rules Smartphones, for years Symbian OS dominated the mobile
world in the mid to late 2000s. Very few today remember how huge, successful
and innovative, Symbian once was.
The
inception of the Symbian platform began with a system referred to as EPOC, an
OS which was created in the 1980s by one company we now only have fond memories
of: Psion. In return for funding in 1998, Psion formed a partnership with
Nokia, Ericsson and Motorola. The partnership led to the formation of Symbian
Ltd. EPOC hence became Symbian OS. The system was designed to run on ARM
processors and was used to power some of the most powerful smartphones at the
time.
A few years
later, Samsung and LG joined Symbian Ltd. to have access to the operating
system.
As rightly
pointed out by Faelten, et al., the essence of all alliances is the same: two
or more corporations agree to operate jointly for a common purpose that they
each feel they are unable to achieve alone.
Flowing
from this, they identify three main reasons for investing in a JV:
1. It
allows partners to pool resources.
2. It
gives partners access to new markets, either geographically or through new
products.
3. It
is sometimes used as a precursor to M&A, allowing cultural and other due
diligence over an extended period.
·
Pooling resources
An open
relationship starts with your company identifying and understanding its
strengths and weaknesses. Following closely is the realisation that your
company’s weaknesses are others’ strengths, and vice versa.
In a bid to
overcome its weaknesses, Yahoo! entered partnerships with several companies,
including its competitors, during its reign. Such partnerships have been driven
by access to finance, or technologies and skills that could not simply be
bought.
Yahoo! open relationships
On June 26,
2000, Yahoo! and Google signed an agreement which would make Google power
searches made on yahoo.com.
Yahoo!
formed partnerships with telecommunications and internet providers to create
content-rich broadband services to compete with AOL. On June 3, 2002, SBC and
Yahoo! launched a national co-branded dial service. In July 2003, BT Openworld
announced an alliance with Yahoo!. On August 23, 2005, Yahoo! and Verizon
launched an integrated DSL service.
In July
2009, Microsoft and Yahoo! agreed to a deal that would see Yahoo!’s websites
use both Microsoft’s search technology and search advertising. Yahoo!, in turn,
would become the sales team for banner advertising for both companies. While
Microsoft would provide algorithmic search results, Yahoo! would control the
presentation and personalisation of results for searches on its pages.
·
Access to new markets
The birth of Cereal Partners Worldwide S A (CPW)
In 1990,
General Mills Inc. wanted to expand its business beyond North America but did
not want to build an operation from the ground up. Nestlé wanted to diversify
into cereals, a growing business at the time. In order to achieve their unique
purposes, the two companies established a 50-50 joint venture known as Cereal
Partners Worldwide S A (CPW) and clearly defined what each partner was to
contribute.
General
Mills provided its expertise in making cereal and Nestlé added its brand
recognition and distribution network in Europe and Asia.
Toyota’s first operation in a foreign market
Established
in February 1983, New United Motor Manufacturing, Inc. (NUMMI) was Toyota’s
first overseas operation. The company was a result of a 50-50 JV with General
Motors (GM).
·
A precursor to M&A
In 2004, Nokia
bought Psion’s share of Symbian and became the majority shareholder in Symbian
Ltd. And by 2008, Nokia purchased the entire share in the JV.
·
Knowledge acquisition
Knowledge
acquisition is another reason for investing in a JV, Hill et al. write. When
entering an alliance, a company must take measures to ensure that it learns
from its alliance partner and then puts that knowledge to good use within its
own organisation.
General Motors and Toyota Motor Corp. agree to
build Chevrolet Nova
The
alliance (NUMMI), a factory based in Fremont, California, ran by both General
Motors and Toyota, was entered for the creation of Chevrolet Nova cars for GM. Hill
et al. write that for Toyota, the JV provided a chance to find out whether it
could build quality cars in the United States using American workers and
American suppliers. It also provided Toyota with experience dealing with an
American union (the United Auto Workers Union) and with a means of
circumventing “voluntary” import restrictions. For GM, the venture provided an
opportunity to observe in full detail the Japanese approach to manufacturing.
Encouraged
by its success at NUMMI, they write, Toyota announced in December 1985 that it
would build an automobile manufacturing plant in Georgetown, Kentucky. The
plant, which came on stream in May 1988, officially had the capacity to produce
200,000 Toyota Camrys a year. Such was the success of this plant, however, that
by early 1990 it was producing the equivalent of 220,000 cars per year. This
success was followed by an announcement in December 1990 that Toyota would
build a second plant in Georgetown with a capacity to further produce 200,000
vehicles per year.
By 2012, Hill
et al. continue, Toyota had 14 vehicle assembly plants in North America, 10 of
them in the United States, which collectively produced 7 out of every 10 Toyota
cars sold in the region. In addition, the company had six other plants
producing a range of components, including engines and transmissions. The
company also has two R&D and design centres in the United States, its only
such facilities outside of Japan. By 2012, Toyota’s cumulative investment in
the United States exceeded $19.5 billion. In April 2013, Toyota announced that
it would move production of one of its luxury Lexus vehicles from Japan to the
United States, marking the first time that the company produced a luxury
vehicle outside of Japan. At the same time, Toyota announced that it would invest
another $2.5 billion to expand U.S. production capacity.
JVs are great.
However, a JV could be a disaster if relations are not professionally managed
among partners.
Tiffany & Co ordered to pay almost half a
billion dollars to Swatch
On December
21, 2013, a Dutch arbitration panel ordered the Tiffany & Co. jewellery
chain to pay $448 million in damages to the Swatch Group.
Back in
2007, Swatch, one of the world’s biggest watchmakers announced a JV, Tiffany
Watch Co., with Tiffany, an American luxury jewellery and specialty retailer,
to make watches together under the Tiffany brand.
It all
started out so peacefully. Then things went sour in 2011 when Swatch cancelled
the cooperation.
The Swiss
watchmaker alleged that Tiffany had been trying to block and delay the venture
at the time. Tiffany, on its part, claimed Swatch had failed to provide
appropriate distribution for Tiffany & Co. brand watches. Conflict between
the parties led to legal issues.
Friends
with benefits no longer beneficial.
The
research-based magazine and digital platform for business executives published
at the Massachusetts Institute of Technology, MIT Sloan Management Review,
in an article in its Magazine Summer 2003 Issue Vol. 44 No. 4, notes
that in order to maximise a JV’s potential over the course of its life,
companies must pay more attention to the impact of partner relations on the
performance of their offspring.
Bettina Büchel,
who writes the article in the magazine, “Managing Partner Relations in Joint
Ventures”, identifies and explains five minefields that can explode and damage
relationships in an otherwise fruitful operation.
·
Unclear Partner Roles
Büchel explains
that during negotiations between two potential partners, a lack of clarity
about how closely the two sides intend to work together is a common problem.
She writes
that some ventures require the active participation of both parents to be
successful, while others do not. In a venture that has a clear majority owner,
the minority partner may be contributing money, a brand name or rights to a
technology and has no interest in being consulted on day-to-day decisions. In
such cases, information flows primarily between the majority owner and the JV
management team. A willingly passive partner is the key to the success of a
majority-minority venture. Matters are more complicated in a venture structured
to be a 50-50 or when the minority partner wishes to participate actively in
the decision making.
In 50-50
joint ventures, Büchel continues, the companies expect to make roughly the same
effort. But the key to a 50-50 operation is bringing together unique skill
sets, so defining what constitutes an equal contribution of work can be tricky.
The parents of a proposed partnership must articulate their assumptions and
involve key people (who will continue to play a role in the venture) during the
negotiations to define the contributions they will make and the benefits they
expect.
The
strategy for CPW works, Büchel comments. The JV has expanded operations to 130
markets and captured a substantial percentage of the international cold-cereal
business.
According
to her, keys to this success include the upfront definition of the joint intent
and the involvement of key executives from both sides early in the negotiation
process. In addition, the venture’s negotiators were able to check with top
management to remove many of the ambiguities (such as the definition of
“cereals” in this case) that are frequently associated with unclear intentions.
·
Unequal Sharing of Risks and Benefits
She writes
that an important issue to resolve before finalising any deal is how the value
generated by the venture will be distributed between the parents. When the
reward earned by one company is perceived as exceeding the risks it is
absorbing – possibly as a result of opportunistic behaviour on the part of
managers during the initial negotiations – an alliance becomes ripe for early
dissolution.
Ensuring an
equitable risk-benefit ratio is crucial to the long-term health of the
alliance. If such a ratio is to be clearly visible to the participants, Büchel cautions
that another must be avoided: non-transparent payoffs to parents.
Non-transparent payoffs occur when one parent is, for example, selling components
to the venture and does not disclose to the other the margins generated through
those sales. The lack of transparency means that one partner cannot be sure
when, how and to what extent the other is profiting. Non-transparent payoffs
are a source of distrust especially when the JV is suffering losses. One side
often suspects that the other is profiting at the expense of the venture.
Büchel
further cautions that equity in the relationship should not be mistaken for
equivalence of earnings. In an equitable relationship, one parent may
contribute more for a certain period of time, in the expectation that the other
will contribute more in future years, yet the exact nature of the benefit may
be different. The more the parents perceive that the right balance of
contributions and rewards exists, the better JV performance will be.
Simply put,
Büchel notes, in higher-performing JVs, each parent believes the financial
return is fair, considering what each is contributing. So that suspicions of
unfairness do not arise later, managers leading the negotiations should not
always put the “deal” ahead of all other interests. Once the negotiating managers
walk away, the deal has to be implemented. It will not work if trust is
breached as a result of deal making that takes advantage of one side’s weaknesses
or mistakes.
·
Distrust of the Joint-Venture Manager
Once the
deal is signed, Büchel writes, the organisation’s board of directors meets for
the first time and has its first contracts with the JV manager and their team.
Distrust between either of the partners and the venture’s chief executive can
seriously hamper the latter’s ability to make decisions and can consequently
limit the new company’s competitiveness. It is important to establish a high
level of trust at the outset so that the JV manager has the freedom to make
decisions that are in the venture’s best interests.
She
observes that when the chief executive is from one of the parents – as is often
the case – he will have to go to extraordinary lengths to show the other parent
that he can be fair. The JV CEO should spend time with executives from both
sides that have business links to the venture but are not part of the board. In
formal meetings, the JV manager has to lay out his strategy, show how the new
organisation will have a positive impact on the parent’s business, and demonstrate
sensitivity to the issues that are particularly important to that parent.
Informal meetings are also useful, as the relationships that form may lead to
the venture executive getting the benefit of the doubt in times of potential
conflict.
But the
responsibility for making things run smoothly is not solely the venture
leader’s, Büchel continues. When the new operations manager has a time-bound
contract, the implicit message is “We do not really trust your decision
making.” And the original architects of the joint venture are responsible for
aligning the two sides at the outset and selecting a general manager who can
earn people’s trust.
·
The Inevitable Crisis
If a JV
gets off to a successful start, it will settle into a normal pattern of
operation and stable relationships, Büchel writes. Effective day-to-day
routines will be established, and life will be somewhat predictable. The test
of the JV will invariably come, however, when something out of the ordinary
happens. The most difficult events are those that have the potential to pit the
parents against each other.
The JV between HP and Ericsson
She moves
on to narrate two events at Ericsson Hewlett-Packard Telecommunications (EHPT)
that led to conflicts requiring renegotiations. One emerged at the April 1994
board meeting. Briefly, HP wanted to use a platform that it had developed
internally as the basis for the JV’s core product (a network-management
platform for telecom operators), while Ericsson felt that the HP standard did
not have sufficient functionality to serve as a basis for public
telecommunication customers; it wanted to continue the joint development of the
product in the new venture. A year later, at the April 1995 board meeting, HP
made the case that it should be allowed to sell EHPT products through its own
sales organisation, but Ericsson had been designated as the sole sales channel
for the JV.
In both
cases, Büchel writes, compromises were reached. The key was the involvement of
two of the original architects, both of whom were also on the board of the JV.
The two executives resolved the difficulties that came up in 1994 and 1995 by
aligning their respective organisational interests with the JV’s interest. They
started by posing the question, why are we pursuing the JV? For HP, the answer
was increased access to telecommunication operators; for Ericsson, it was to
provide a standardised high-quality network-management product. Both board
members worked with the JV manager on a business plan that was aligned with the
goals of the parent organisations.
Having two
board members, one from each parent, serve as problem solvers is ideal, Büchel
observes. It is even better if they are the original architects of the venture.
On the flip side, sometimes a manager from the JV can create the inevitable
crisis, as the EHPT example also illustrates.
After the
venture began, she continues, HP appointed an alliance manager, an HP employee
who was responsible for the interface between the JV and HP. That manager,
however, became a bottleneck for information sharing. The JV’s engineers needed
to share information directly with HP engineers if the common EHPT platform was
to be a technical success; more specifically, engineers from EHPT needed
proprietary information about an R&D project within HP to work effectively.
But HP’s alliance manager blocked direct contacts with HP engineers because she
was afraid that such interactions would lead to an unwarranted transfer of
intellectual property to Ericsson employees. She would not allow for direct
contact until she got HP management approval, a process that took nine months –
during which no work on developing the product was done.
Büchel
therefore notes that an alliance manager should facilitate the sharing of
information within the JV, which in part requires negotiating with the parent
about what is and is not proprietary. At the very least, someone in this
position should help ensure that the JV does not founder over conflicts about
shared knowledge.
·
No Exit Mechanisms
When
conflicts escalate beyond a certain threshold, and the parties no longer feel
they can work with each other, it is vital to have a formal exit mechanism in
place so that costly and time-consuming litigation can be avoided, explains
Büchel.
In the EHPT
joint venture, she writes, the venture’s business model came under scrutiny at
a January 2000 board meeting. The question was whether in the future EHPT
should focus on developing the network-management platform as well as providing
network-management solutions or focus only on the latter. The venture had a
contractual agreement in place that dealt with such deadlock situations, so the
conflict was manageable (the platform business was transferred back into
Ericsson).
Needless to
say, she observes, if the venture is ending on a high note in which both
parents have achieved what they wanted, the exit is not difficult to arrange.
But if the venture is ending after years of poor performance, with one parent
no longer able to absorb the losses, the exit negotiations are likely to be
acrimonious.
When the
Swissar Group decided in April 2001 to pull out of AOM/Air Liberté, Büchel
illustrates, the French airline group went into bankruptcy. Swissair had no
explicit exit clauses and owned 49.5% of the group. This led to tough
separation talks that included the French government, which did not want to let
Swissair out of the venture. In July 2001, a French tribunal ruled against the
breakup of the airline group, approving a takeover bid led by a former pilot
from the Air France Group, instead. Swissair was obliged to provide $174
million to give the airline a fresh start.
She notes
that, in order to avoid a similar scenario, it is important to include deadlock
provisions in the original agreement that make it possible for the various
partners to exercise buy-sell options at a predetermined valuation price (EHPT
had such provisions, which facilitated the smooth conclusion of that venture).
Crafting exit clauses by thinking about worst-case scenarios has only recently
become a commonly accepted practice. Explicitly discussing and formalizing
procedures in case of escalating conflicts would be a useful extension of the
ideas behind formal deadlock provisions and exit clauses.
An open corporate relationship status can be awesome. In fact, your company may not be able to survive (in the short or long run) without entering such affairs. However, before you have your cake and eat it, be sure you have the right cake containing the right ingredients.
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