While researching strategic alliances, and in particular the
joint venture with Walmart and Bharti, I stumbled on some interesting information.
In a book written by Sporleder, T. (2006) he defines 3 types
of strategic alliances; non-equity alliances, equity alliances, and joint
ventures (p.163). According to Sporleder,
T. (2006) non-equity alliances often include fuzzy arrangements which in turn
can create distrust in the alliance (p. 163).
We learned a lot about trustworthiness this week in Barney & Hansen
(1994), and based on their definitions of trust, a fuzzy agreement in a
non-equity alliance would rely heavily on strong form trust (p. 181). Since there is no governance the alliance
partners have to believe the other has high morals and strong ethics as there
is little recourse if they disappoint and do not.
As I was reading Sporleder, T. (2006) I came across a
statement regarding the viability of alliances; “Consensus among analysts is
that strategic alliances, in general, are relatively unstable business
arrangements even when there is a separate legal entity involved” (p.165). As I investigated this further I found this
to be true in many real life examples.
US companies are vulnerable in international alliances as
evidenced by the US-Vietnam joint ventures that slowed dramatically during the
1990’s due to high failure rates (Kim, S. & Kim, S.H., 2006). One example is a multi-million dollar rice
joint venture with a US company, American Rice, and a local Vietnamese
company. In 1994 American Rice reached
out to this local partner to set up a rice exporting business. This alliance was an example of one of Gulati
(1998) reasons for why partners align.
According to Gulati (1998) one reason an alliance transpires is a
“critical strategic interdependence resulting from country-specific resource
advantage” (p. 299) However, soon after the partnership began the local partner
changed the new fees that doubled the cost of the alliance and the local partner
did not provide the expertise American Rice needed to do business in Vietnam. Due to the lack of advice from the local
partner, American Rice procured rice directly from farmers instead of a middle
man and the Vietnamese Government didn’t approve of this procuring practice. The Vietnamese Government felt American Rice
was circumventing the usual business practices and fined them millions of
dollars. American Rice was forced to close its doors in 1998 after losing
millions of dollars (Kim, S. & Kim, S.H., 2006).
I came across another article on problems with joint
ventures that was written in 1975.
Hamlisch, R. & Moore, G.K.F (1975) wrote an article for the Project
of the Development of Fisheries for the United Nations. Although they are referencing fishery joint
ventures I think the advice to The Food and
Agriculture Organization of the United Nations (FAO) is sound
even today. They point out that failure
in a joint venture exists when the partners do not do their homework and plainly
identify what each partner brings into the alliance. A key problem identified
by Hamlisch, R. & Moore, G.K.F. (1975):
“Many of
the problems encountered in the negotiation and operation of fisheries joint
ventures in general have been
occasioned by a lack of community of interests between the partners or at least
a clear understanding and appreciation of each other's basic objectives in the
venture. Such lack of community or appreciation of interests may lead to the
atmosphere of distrust that is so often a cause of the failure of a
joint venture operation”.
References:
Hamlisch, R.
& Moore, G.K.F. (1975), “Joint Ventures in Fishery Development in the CACAF
Area”. THE EASTERN
CENTRAL ATLANTIC FISHERIES DEVELOPMENT PROJECT. Extracted from website: http://www.fao.org/DOCREP/003/H0222E/h0222e00.htm#Contents
Kim, S. & Kim, S.H. (2006). Global Corporate Finance. Melden, MA: Blackwell Publishing.
Sporleder, T. (2006). Quantifying the Agri-Food supply Chain”. : Springer
Netherlands publisher
Kristina, you provide some interesting examples of partnerships gone wrong.
ReplyDeleteWith respect to the American Rice/Vietnamese partner alliance, what sort of governance structures were in place? Do you think that if a different type of structure had been put in place, the relationship might have been more successful?
You talk specifically about international alliances. Do you think that the sorts of challenges that emerged in the examples you discuss are more likely to arise in cross-border alliances, or could they just as easily happen in alliances with partners within the same country? Why or why not?
Hi Jessica,
ReplyDeleteI tried to find governance structures for the American Rice deal and I couldn't. But the excerpt I read lays out parts of the deal that gives some clues to allow me to hypothesize an answer to your second question. I assume the governance wasn’t adequate. But I am not sure if even a well thought out documented governance would have alleviated the headaches American Rice was up against. Between the local partner’s disregard of the venture deal and Vietnam Government’s interference, American Rice didn’t have a chance to ever successfully export rice in that deal.
According to Harvard Law School Forum, many private joint ventures are adopting governance best practices from public companies (Glover, S. 2012). This is partly due to the pitfalls when the individual partners focus on their own agenda and it is sometimes difficult to address these problems with just vanilla governance rules. Which was the case with the local partner in Vietnam who shortly after the JV was finalized denied American Rice a permit and after pressure to finally do so reduced the amount of rice to export by 90,000 tons. This act leads one to assume that it benefited them in some way by delaying the export and reducing the amount or they wouldn’t have done it.
It takes some careful planning from both parties to put checks and balances in place to monitor the actions of the other. And in the case of American Rice I am not convinced that even if they had these well thought out governances in place if their situation would have been any different.
I think in the case of American Rice many of the circumstances in that joint venture were specific to an international alliance. I do think that this same sort of undermining between partners does happen in a domestic JV which is evident by the high failure rate.
Glover, S. (7 Feb 2012). Harvard Law School Forum. Recent Trends in Joint Venture Governance. Retrieved from http://blogs.law.harvard.edu/corpgov/2012/02/07/recent-trends-in-joint-venture-governance/