Eight Case-Lets on Strategic Alliances

Table of Content

Case 1: Telefonica and China Unicom

In September 2009, Telefonica and China Unicom announced a partnership including cooperation in R&D, roaming, joint procurement of equipment, infrastructural development, joint development of mobile services and the provision of services to multinational clients. They also announced the purchase of US$1 billion worth of stock in each other making the Spanish operator the largest single investor in the company with 8% of shares. China Unicom would in turn acquire a 0. % stake in Telefonica, the former Spanish telecoms monopoly, which owns the European mobile operator O2 and is the largest mobile operator in Latin America.

The alliance between Telefonica and China Unicom dates back to 2005 when Telefonica invested in China Netcom, that was acquired by China Unicom after the restructuring of the Chinese telecom industry. As a result of this recent development, China Unicom subsequently repurchased a 3. 8% stake held by SK Telecom. A separate alliance between China Unicom and SK Telecom was formed in 2006 to exploit potential synergies for their respective CDMA networks. The divestment was fuelled by the fact that the alliance’s rational ceased to exist as China Unicom sold its CDMA network to China Telecom.

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Case 2: Vodafone-led alliances

Vodafone is an organization that has traditionally used strategic alliances to fuel its growth. Leveraging its brand and advanced P&S suite, it allows partner operators to benefit from its R&D efforts and brand recognition while in turn expanding its geographical footprint and seamless service to its own customers with minimal capital investment.

The Vodafone alliance with Telekom Malaysia, signed in 2006, is a good example of a successful Vodafone-led partnership. Vodafone signed a Partner Network Agreement with Telekom Malaysia covering the three TM subsidiaries; Celcom (Malaysia), XL (Indonesia) and Dialog (Sri Lanka). The deal allowed the three operators to gain access to Vodafone’s international voice and data roaming services, together with Vodafone’s suite of business solutions. In return, Vodafone extended its brand and services into high-growth mobile markets, pursuing a low-risk, non-equity strategy and provided its customers ith access to preferential roaming rates. Another example of a successful non-equity strategic agreement is the du and Vodafone alliance formed in 2009.

The essence of the partnership is to better meet the needs of their respective customers in the UAE. The first phase of the agreement allowed du, a new entrant in the UAE market, to gain access to Vodafone’s extensive suite of products, services and devices for the UAE market. Both Vodafone and du customers gained preferential roaming rates on the partners’ networks. u is also able to leverage Vodafone Group’s procurement to achieve cost reductions. During the second phase of the agreement announced in late October 2009, additional joint initiatives were explored including mobile broadband connectivity products, secure remote mobile access for small business users, converged email solutions, faster and exclusive access to new models of handsets.

Case 3: Bridge Mobile Alliance

Bridge Mobile Alliance is a business alliance of eleven major mobile companies in Asia and Australia. Members include Singtel (Singapore), Airtel (India), AIS (Thailand), CSL (Hong Kong), CTM (Macau), Globe (Philippines), Maxis (Malaysia), Optus (Australia), SK Telecom (S. Korea), Taiwan Mobile (Taiwan) and Telkomsel (Indonesia). The alliance is built on seamless service connectivity and a suite of integrated value-added services for all alliance members’ subscribers, roaming across each other’s networks. The alliance acts as a commercial vehicle in which all the operators jointly invest to build and establish a regional mobile infrastructure on a common service platform enabling seamless experience for customers while roaming.

The alliance also serves as a focal point to develop new P&S on a regional basis and creates competitive advantages and differentiation for the mobile operators in their respective markets, wherein the objective is to be a magnet to attract leading handset, network equipment provider, and technology and content players to establish high value-added mobile activities.

Case 4: Bharti Airtel

Bharti irtel’s association with telecom vendors One of the first alliances on outsourcing of core functions to vendors was formed by Indian operator Bharti Airtel in 2004.

The operator stunned the telecom world when it partnered with established players such as Ericsson, Nokia Siemens, IBM, and six BPOs in multi-million dollar deals to outsource its network, IT, and call centre functionalities. The concept led to some very innovative business models of ‘managed capacity’ and ‘revenue-sharing’. In the network area, the operator opts for a ‘pay-per-use’ model for network capacity usage, hence avoiding the upfront capital expenditure.

The capacity usage and pricing modalities are measured by way of network usage in terms of US$ per erlang while the recurring payments are linked to usage and assured quality as per stipulations in predefined SLAs. In the IT area, IBM signed a partnership that would include management of all of the operator’s IT functions wherein the pay-out to the vendor was a % of the operator’s annual revenues. Such mechanisms ensure a close integration between operator and vendor stressing the essence of commitment in successful alliances. Case 5: Celcom’s association on mobile content

In 2007, Zingmobile and ESPN STAR Sports announced a partnership to launch mobileESPN on Celcom’s network in Malaysia. The content platform enabled sports fans to access premium customizable sports content in the form of ‘live’ news coverage, in-depth match analysis, breaking news and top stories, allowing subscribers to get updates and access their favorite sports. The services were offered by subscription or as on-demand download.

Case 6: Iridium

Iridium, the global, satellite based phone system, recently declared bankruptcy. One of the most celebrated multinational strategic alliances in corporate history, Iridium’s collapse came as a shock to many. Background Note Iridium was promoted by Motorola, one of the leading semiconductor companies in the world. Motorola’s intention was to develop a phone system that could make communication possible between any two points in the world. The company’s gameplan was to use orbiting satellites to pick up signals from cellular phones and relay the conversation from satellite to satellite till he signal could be transmitted back to the ground.

Iridium, as the venture came to be called, aimed to provide consistent communication signals which would not fade even in airplanes. Motorola planned to make the system compatible with existing ground cellular networks. It felt that Iridium would become a highly profitable venture, keeping in view the explosive growth of the cellular phones business. Motorola’s market research estimated that between 600,000 and 800,000 people would subscribe to Iridium as soon as it was implemented by 1997.

The number was expected to go up further to 1-1. 8 million by 2002 and to 5 million by 2019. The main customer segments were identified as international business managers, high net worth individuals, airlines, international air passengers and marine vessels. The complicated project, called for several capabilities which Motorola did not have internally. Motorola lacked both the expertise and the resources to build the 60 satellites or more that would be needed. Motorola also needed traffic rights in different countries.

It wanted access to various supporting technologies associated with space communication. Realising the enormity of the project, Motorola decided to put in place a multinational strategic alliance consisting of 17 partners, with varying equity stakes. They included Raytheon, Lockheed Martin, Krunichev Enterprise China Great Wall and Nippon Iridium (itself an alliance of 18 Japanese partners). Motorola faced the obvious challenge of integrating the activities of the partners, which had expertise in different areas such as satellites, ground based stations, and system software.

To manage the Iridium project and integrate the efforts of the partners, Motorola decided to set up a separate dedicated unit: called SATCOM (Satellite Communication Division). Motorola also formed an executive steering committee, which included all the major partners. The committee met once in two weeks to monitor progress and resolve conflicts. Team members also received training in trans-cultural and inter organizational skills. Notwithstanding all these efforts, the alliance ran into problems.

In early 997, Iridium announced a delay in the launch of its service, owing to problems with the McDonnell Douglas rocket that would carry the satellites into orbit. McDonnell Douglas announced that additional expenditure was necessary to compress its project completion schedule and get all the satellites into orbit as per the original deadline of June 1998. Disputes however arose on how the additional costs would be shared. As Business Week reported, “McDonnell Douglas says it will charge Motorola tens of millions of dollars extra to compress its schedule and get all the satellites launched by the original deadline of June, 1998.

Motorola wants Iridium to pick up the additional costs, but the hard-nosed Staiano is having none of it, the sources say. McDonnell, Motorola and Iridium won’t comment. ” Iridium came under pressure, as it could ill afford any further delays. According to a report1, “Iridium can’t afford any lengthy delays, since competitors are moving quickly to market. Most potent is Global Start, a $2. 5 billion satellite phone system backed by Loral Space & communications Ltd that expects to start operations late next year. Whoever is first to market could seize the lead in what analysts estimate could be a $ 15 billion industry by 2005.

In early 1998, press reports indicated that Iridium would probably be able to launch its service by the end of the year, but might have to struggle to find customers. This was bad news for the alliance, which had already invested $5 billion by this time. In November, 1998, Motorola put into orbit 66 satellites. However, even by the end of March 1999, Iridium had failed to attract more than 10,000 subscribers. The service was quite obviously expensive with $3000 for the handset and $5 a minute for calls. Iridium also seemed to have made a blunder by launching its service before it had become fully operational.

After a high profile advertisement compaign in October, 1998, many customers who requested the service were not given allotment, with the two main manufacturers, Motorola and Kyocera (Japan) being unable to maintain their production schedules. Fortune aptly summarised the challenges ahead of Iridium in its bid to expand its customer base: “Iridium won’t be the only worldwide system for long. The cellular industry is working on its own land based global network which should be available in the near future. Iridium will also face challenges from four other satellite systems…

All told, these players will fight for a pretty small market – itinerant executives and people in remote locations, like sailors and airline pilots and Sudanese goatherds. But it’ll be hard to capture even these customers. Many airplanes and ships have existing systems, so there’d be little point in buying a $3000 Iridium unit that costs $4 to $7 a minute to use. ” Bankruptcy Iridium CEO, Edward Staiano, who had joined the company in December, 1996, resigned on April 22, 1999 after differences over Iridium’s future strategy with strategic investors.

Staiano had been facing severe criticism for concentrating on technology at the expense of marketing. Iridium’s slow start had begun to worry investors by this time. Delays in producing the handsets and the high price of the service were cited as the main reasons for sluggish sales. On August 11, 1999, Iridium announced that it was in default on an $ 800 million loan. In mid 1999, Motorola announced that it would not provide additional support for Iridium beyond its existing contracted commitments, unless there was substantial participation in Iridium’s restructuring from other partners as well.

On March 17, 2000, a bankruptcy judge moved to liquidate Iridium. Conclusion The failure of Iridium offers several useful lessons. The project which looked futuristic in the late 1980s was clearly outdated a decade later. While Iridium continued to launch satellites, competitors were building extensive and cheaper terrestrial networks and standardizing protocols. Iridium was meant for customers in remote locations, but with the service being perceived to be too expensive for the value it offered, customers were not easy to attract. Many customers preferred cheaper GSM format mobile phones.

Iridium was also handicapped by a low data exchange speed of 2. 4 kilobits per second at a time when basic modems could handle up to 56Kilobits/second. As Michael Cusumanohas explained, there are three important lessons to learn from the Iridium disaster. When technology is changing rapidly, it is important to reduce the time to market. Reducing infrastructure requirements and spreading investment risk is important to prevent financial disasters. Whenever any new technological initiative is being launched, the threat from substitutes also has to be carefully considered.

To this a fourth lesson can be added. An alliance is as good as the additional value it can generate. With the partners failing to come up with a product with an appeal to a vast customer base, termination was the only option for Iridium.

Case7: Maruti Udyog Ltd Introduction

Maruti Udyog Ltd (MUL), the joint venture between Suzuki Motor of Japan and the Government of India, began operations in 1982, to achieve the Indian Government’s cherished ambition of designing a small car for the masses. Suzuki had a 26% stake in the venture, which was hiked, to 40% in 1988.

Till 1992, the Government of India held a majority stake, but by and large adopted a hands-off attitude towards the venture. At this juncture, Suzuki was allowed to increase its stake from 40 to 50%, giving the company much greater operational autonomy. While Suzuki was allowed to take most of the operational decisions, a new agreement stipulated that the government and Suzuki would take turns to appoint their nominees as CEOs. MUL’s CEO R. C. Bhargava, had been in government service for a long time and was on deputation to MUL. After the new agreement was signed, Bhargava remained the managing director, but as a Suzuki nominee.

Bhargava not only enjoyed the trust of Suzuki, but also used his influence in the union ministry to facilitate the smooth functioning of the unit. Bhargava however, was a controversial figure and had drawn flak from some of India’s leading politicians, for being close to the Suzuki management. According to some reports, Suzuki had benefited significantly during Bhargava’s tenure. As one unnamed source revealed: “More than 90% of the machinery in the Maruti Udyog factory comes from two Japanese firms, Nissho Iwai and Sumitomo, which were awarded the contracts without any competitive bidding.

Bhargava, however, justified his strategy:  Let us take purchase decisions. The standard position in any automobile company is that there are one or two suppliers. You call them when you want to buy a machine and negotiate with them. Nobody does global tendering. Problems Matters came to a head in 1994, when MUL felt an urgent need to increase capacity. With its internal resource generation not being adequate, Suzuki proposed a combination of additional debt and equity.

The government, handicapped by a huge fiscal deficit was not in a position to make its contribution and felt that if Maruti alone were to bring in the additional equity, it would be reduced to a minority shareholder. The idea of a public issue remained a non-starter as first Suzuki, and subsequently the government, expressed their misgivings. Suzuki’s relationship with the government deteriorated when a leading Indian politician from the south, K. Karunakaran, became the industry minister. Karunakaran was not only hostile to Suzuki, but also made political demands, such as location of Maruti’s proposed new plant in his home state of Kerala.

Under the next industry minister, M. Maran, the relationship worsened further. In August 1997, the Government of India went ahead with the appointment of its nominee, RSSLN Bhaskarudu as the new managing director, in place of Bhargava. Suzuki seemed to be visibly upset by this move and a senior executive1 commented: ” It is extremely regrettable that the Indian Government notified us of the appointment of a person who Suzuki believes is not suitable for the post in the joint company. ” Suzuki charged that Bhargava had not been consulted.

It also felt that Bhaskarudu’s candidature had not been suitably assessed and that the government’s part-time directors, who were behind Bhaskarudu’s elevation, were hardly in a position to take such a major decision. Many Indian analysts, however, felt that Suzuki’s objections were surprising, especially when Bhaskarudu’s rapid progress up MUL’s corporate ladder was taken into account. As one2 argued: “Suzuki’s sudden discovery that Bhaskarudu was unsuitable seems to have everything to do with the bitterness which has crept into Suzuki’s relationship with the Government over the last three years.

Unlike Jagadish Khattar, currently executive director, (marketing) widely perceived to be Suzuki’s candidate for MD and Krishan Kumar, executive director (engineering), Bhaskarudu was not considered to be sufficiently pro Suzuki by the Japanese. ” Suzuki decided to take the issue to the Delhi High Court and subsequently to the International Court of Arbitration (ICA). Resolution of Dispute For several months, the impasse continued, raising serious concerns about the future of the joint venture. It was only in mid 1998 that meaningful discussions between the Government of India and Suzuki could begin.

In the second week of June, 1998, the new industry minister, Sikander Bakht, announced that a compromise deal had been worked out and that Suzuki would withdraw the case pending before ICA. The government announced that Bhaskarudu’s term would expire on December 31, 1999, instead of August 27, 2002, as decided earlier. One of the reasons for the government’s flexible attitude was the sanctions imposed by many developed countries on India after the nuclear tests it conducted in May 1998. Consequently, the need to send positive signals to Japanese investors had become compelling.

Lessons from MUL Maruti is a good example of how a joint venture can continue to operate successfully, despite occasional tension. One reason for the two partners sticking together has been a marriage of interests. While Suzuki brought in technology, the Indian Government decided to offer special customs duty concessions and land at throw-away prices. According to Business World. “So even if one argues that the final successful product, the Maruti 800 was Suzuki’s, the fact remains that the environment in which it became a success was crafted by the government.

And by the time liberalization forced the government to open its doors to other auto players, Maruti was already on top of the heap, with an awesome 80% market share. ” Credit should also be given to the government for giving Suzuki operational control. In other words, both, the Government of India and Suzuki, have contributed equally to Maruti’s success. Even at the height of the crisis, Suzuki had strong reasons for not pulling out. The joint venture was not only generating good profits, but was also allowing Suzuki to export many components to India.

Bhargava admitted2: “The company is making more money than ever before. It would be very strange if Suzuki were to get out of Maruti. ” Yet, the most important reason for MUL’s extraordinary success in India has been its ability to offer a high quality, value for money product to the country’s price sensitive customers. It is quite possible that the Indian government may sell off its stake in MUL, as part of its disinvestment drive, which is picking up momentum. The fact, however, remains that MUL has been an unqualified success for both the joint venture partners. For the time being at least, the government and Suzuki will stick together in what has emerged as a winning team.

Case 8: The P & G – Godrej split

In late 1992, the American FMCG (Fast Moving Consumer Goods) giant, Procter & Gamble (P & G) and the leading Indian business group, Godrej announced the formation of a strategic alliance that seemed to hold great promise for both companies. As part of the deal, the two companies set up a marketing joint venture, P -Godrej (PGG) in which P held a 51% stake and Godrej the remaining 49%.

David Thomas, P’s country manager in India was appointed as CEO while Adi Godrej, the head of the Indian company, became the chairman. Structure of the alliance Three P&G executives played a major role in finalising the terms of the agreement – former P&G (India) CEO, Gurcharan Das, incumbent CEO, David Thomas and P&G’s in-charge for the region, based in Hong Kong, Winfried Kascner. P paid Godrej roughly Rs 50 crores to acquire its detergent brands, Trilo, Key and Ezee. Godrej became the sole supplier to the joint venture on a cost plus basis.

P, on its part, gave a commitment that it would utilise Godrej’s soap making capacity of 80,000 tonnes per annum. Godrej was allowed to complete its existing manufacturing contracts for two other MNCs, Johnson & Johnson and Reckitt & Coleman, but could not take up any new contracts. P&G, on its part, would not appoint any other supplier until Godrej’s soap making capacity had been fully utilised. Godrej transferred 400 of its sales people to the joint venture. P acted quite fast in finalising the joint venture, probably expecting arch rival Hindustan Lever to move in, if it did not.

For both sides, the joint venture seemed to make a lot of sense. P got immediate access to Godrej’s soap making facilities. It would have taken P&G at least a couple of years to implement a greenfield project. Godrej also had expertise in vegetable oil technology for making soaps. This expertise was useful in a country like India, where beef tallow could not be used and soap manufacturers had to depend on vegetable oil such as palm oil and rice bran oil. Another significant benefit for P&G was an immediate access to a well connected distribution network consisting of some two million outlets.

Even though P&G had been around in India for some time, its Indian operations were essentially those of the erstwhile Richardson Hindustan, which dealt primarily in pharmaceutical products such as Vicks. The non-pharma distribution network of Godrej, acted as a fine complement to P&G’s existing pharma network. Godrej, on the other hand, was struggling with unutilised capacity. Godrej, also hoped to pick up useful knowledge from P, in areas such as manufacturing, brand management and surfactant1 technology.

In short, it looked as though the joint venture had created a win-win situation, with tremendous learning opportunities for both partners. Implementation The P Godrej alliance became operational in April 1993. Around this time, P increased its stake in its Indian subsidiary P (India) from 51% to 65%, while Godrej, after having operated for several years as a private company, went public. As soon as the alliance became operational, P engineers introduced new systems such as Good Manufacturing Practices and Material Resources Planning in Godrej plants.

The two companies seemed to show a considerable amount of sensitivity to the cultural differences between them. For about a year, it looked as though things were going fine. Thereafter, elements of distrust began to surface and the two companies found the differences in management styles too significant to be brushed aside. By December, 1994, rumours were rife that P and Godrej did not see eye to eye on many key issues. Problems One of the main problems that the joint venture faced was that performance did not match up to expectations.

In 1992, Godrej had sold 29,000 tonnes of soap. This increased to 46,000 in 1994 but declined sharply to 38,000 tonnes in 1995. While sales volumes were not picking up as expected, costs were rising. Due to the cost plus agreement, Godrej had little incentive to cut costs. Informed sources felt that Godrej was charging Rs 10,000 more per tonne than the accepted processing costs. Godrej, on its part, was unhappy that P was not doing enough to promote brands like Key and Trilo that it had nurtured over the years.

It was also uncomfortable with P’s methodical and analytical approach as opposed to its own instinctive method of launching brands at breakneck speed. P&G, on its part, felt that there was little logic or coordination in Godrej’s brand building exercises. Its multinational, worldwide policy set its own priorities, as explained by a P executive2: “We believe in introducing long-term brands with sustainable consumer propositions. Without that, we just don’t know how to sell. ” By mid 1994, sharp differences had developed between P and Godrej.

A senior Godrej executive, H. K. Press, on deputation to the joint venture, was quietly eased out and sent back to a Godrej group company. A Business India report aptly summed up the situation: “In an atmosphere of fraying trust, the advantages of the alliance faded into the background Procter on its part had gained distribution strengths but found itself locked into an unsustainable manufacturing agreement and a joint venture that was losing money. Godrej felt let down on two counts.

The capacity was not being utilised as guaranteed and more crucially, P&G’s manufacturing process was not delivering any benefit to Godrej’s painstakingly built portfolio of brands. ” Closure In late 1996, P and Godrej announced that the alliance was being terminated. The two companies would have little to do with each other, except for Godrej continuing to make Camay on behalf of P for two more years and providing office space to P at its Vikhroli complex. PGG would be taken over by P, which would also retain the detergent brands, Trilo, Key and Ezee.

Most of PGG’s 550 people and the distribution network consisting of some 3000 stockists would stay with P&G. Godrej would absorb about 100 sales people and get back its seven soap brands, which had been leased to PGG. Both P&G and Godrej felt that the amicable parting of ways made sense. Adi Godrej remarked1: “This will enable us to pursue business expansion opportunities that have occurred as a result of liberalization. ” David Thomas explained that the parting of ways would enable2 “both parties to independently pursue the broad array of growth prospects offered by the strong pace of economic reform. After the termination of the agreement, Godrej faced the challenging task of injecting new life into its dormant soap brands.

A silver lining in the cloud for Godrej was the distribution network of Transelektra Domestic Products, a mosquito repellant company it had acquired. P&G on the other hand, found itself left with only one soap brand, Camay. Some analysts felt that the real winner from the collapse of the alliance was India’s unchallenged FMCG King, Hindustan Lever, which looked well placed to take full advantage of the situation.

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