Gary Hamel proposes the idea that a firm can be conceived as a portfolio of core competencies rather than a portfolio of product-market entities. In this conception, competition between individual firms is based on acquiring new skills, and how fast, how efficiently and how much skills a firm acquires defines its competitiveness. Porter’s ideas of competitive strategy or competitive advantage fail to fully explain this new skill acquisition process.Lack of skills or the urge to skill building motivates firms to enter join ventures or alliances. An alliance maybe a business alliance where firms come together to exploit their existing capabilities/skills/assets or a learning alliance where firms hope to learn products, skills, knowledge from each other.The choice to engage in such alliances is a function of expected returns from these strategies, managerial cognition of the environment and strategic intent of the firms.The way an alliance is structured and managed is dependent on what type of alliance it is.
Research has indicated that in any market, most alliances are exploitative than explorative. It is a race to learn from the partner, i.e. acquire and internalize the partner’s skills, etc rather than have access to such. Bargaining power of a partner in an alliance is based on relative urgency of cooperation, available resources, individual strengths and weaknesses. Dependence on a partner – the access to key resources.Shifts in bargaining power and the degree of dependence on a partner contribute to instability in JVs.Another way to look at this is that each firm derives payoffs from alliances in different forms(private benefits, common benefits, relative scope). Magnitude of benefits derived and the transferability of these benefits defines how the JV is structures and managed. Changes in these can lead to instability and friction within JV.
Why JVs form?<br />Inter-firm competition is concerned with skill acquisitions<br />Skill discrepancies motivate joint ventures/alliances<br />Motivation is for either:<br />Exploring new opportunities<br />Exploit existing capabilities<br />Terms for motivation is based on:<br />Expected returns<br />Managerial cognition of the environment<br />Strategic Intent<br />
Why are JVs instable?<br />Alliances can tend towards exploitation than exploration<br />Hence, alliances are a race to learn<br />Primary factor contributing to instability is a shift in partner bargaining power<br />Secondary factor is dependence on the partner - for resources which the partner controls<br />Payoffs from the alliance vary as:<br />Private benefits<br />Common benefits<br />Relative scope<br />Shifts in payoff structure shifts bargaining power and dependence within the alliance<br />Long-term value is not substantial when compared to obtained gains, irrespective of magnitude of value. <br />
Reasons for JV Creation in India<br />For foreign partner<br />Government restrictions<br />Indian market unlike other monolithic markets<br />Access to local distribution channels<br />For local partner<br />Access to new technology and processes<br />Opportunity for larger chunk of revenue<br />Pre-empt creation of JV with a rival<br />Proving ground for exporting to external markets<br />
Why do Indian JVs fail?<br />Imbalance in elements of exchange<br />Foreign partners bring in intellectual capability which is difficult to learn quickly<br />Indian partners hand over information of local market, making it comparatively easier to learn.<br />Foreign partners come in with an intent to learn and incorporate this in their process.<br />Indian partners are very lax when it comes to learning. When they do realize, it’s very late.<br />Foreign partners, mainly MNCs, compartmentalize certain knowledge in certain regions – R&D in US, manufacturing in Taiwan, etc.<br />Indian partners do not have this advantage.<br />Big Brother’s hand<br />Foreign partners initiate the JV due to government restrictions, not due to partner’s capability<br />Indian partners take advantage of this, and try to add more restrictions to prevent the foreign partner from creating other alliances instead of learning successfully.<br />
Implications for industry<br /><ul><li>Advantages to market
Reuse learning across other entered domains.</li></li></ul><li>A Case in Point<br />No More<br />It’s<br />vs<br />
Is “Hero Honda” a Success?<br />Achievement - World’s largest two wheeler manufacturer - 50% Market Share in India<br />Competition - Successfully ends the “Bajaj” raj<br />Image - Perceived as the company that put Indian middle class on wheels – DhakDhak Go<br />Investors - $ 3.6 Billion Revenue – 4700 Employees. FY09 – FY10: Operating Profit increases by 28% and Net Profit by 74%<br />Financiers - LAAA Rating<br />
Then is it a bitter divorce?<br />Honda selling its stake at 50% of market valuation<br />Increase in Hero’s royalties to Honda – 3% to 6%<br />Shares sank 9% on the day of announcement of termination<br />
Where did the instability start<br />Race to Learn – New Emission Norms for 2015<br />Shift in Partner Bargaining Power – Indian firms growing more confident in R&D. Strong local supply chain.<br />Dependence on the partner - Honda is well equipped with knowledge about Indian market conditions. Hero ambitious to invest in its own R&D<br />Payoffs from the alliance vary:<br />Private benefits – Honda would like to extract higher royalties for latest technologies<br />Common benefits – Higher royalties would hit “Hero Honda” profitability<br />Relative Scope – JV inflexibilities ceding market share to competition and creating hurdles in grabbing new opportunities<br />
Kyon Hero<br />Strengths<br />Weaknesses<br />- Established distribution network<br /><ul><li>Higher installed capacity