Cooperative, International and Retrenchment Strategies

A Pune maker of brake parts wants to supply electric-vehicle makers, but lacks the motor technology. It can spend years building it alone, buy a firm that has it, or team up with one. Each route shares control, risk and profit differently.

Firms can compete in one market and cooperate in another. Brandenburger and Nalebuff's 1996 book made popular a name for this mix of competing and cooperating: co-opetition.

Back to the brake-parts maker, as an illustration. It could acquire a small motor firm for, say, ₹80 crore. It could form a joint venture: each partner puts ₹40 crore into a new company that makes EV drives, and both carry on their old businesses. Or it could form an alliance: the two firms develop one product together, with no shared company.

These strategies let a firm expand quickly, enter new markets and technologies, and share risk. Working with a competitor makes sense when cooperating gains more than going it alone, through lower costs or a larger market for both.

Don't confuse a joint venture with a strategic alliance. A joint venture creates a new company that the partners own together. An alliance creates no new company: the partners simply agree to work together. Study notes sometimes give Maruti Udyog and Tata Starbucks as strategic alliances. Both began as joint ventures, since each created a jointly owned company: Maruti Udyog was formed by the Government of India with Suzuki in 1982, and Tata Starbucks is owned equally by its two partners. Maruti Suzuki today is a Suzuki subsidiary.

Where it breaks. Research on acquisitions finds that, on average, they do little for the buyer's own performance; much of the gain goes to the seller's shareholders. Buyers often pay too much, and two cultures can clash for years. Partners in a joint venture or alliance may find their goals drifting apart.

In practice. Match the form to the need. A narrow or short-term need suits an alliance. A shared new business, where each partner brings something, suits a joint venture. A need for full control and speed suits an acquisition.

Go deeper for practitioners

A decision. The brake-parts maker must choose: buy the motor firm for ₹80 crore, or a 50:50 joint venture costing ₹40 crore. The acquisition gives full control and all future profit. The joint venture halves the money at risk, but major decisions need the partner's agreement. If the technology is central to the firm's future, control matters more; if the market is uncertain, the smaller bet may be wiser.

Learning races. Gary Hamel (1991) found that partners in international alliances often compete to learn each other's skills; the faster learner can leave stronger. Decide in advance what the partner may learn.

Links. Growth strategies (this unit) covers integration and diversification, which mergers and acquisitions often serve.

Merge, acquire, venture jointly, or ally.

A Coimbatore pump maker starts getting steady orders from Kenya. It can keep shipping from India, license a Kenyan firm to make its pumps, or build a plant there. Each step deeper brings more control, and more money at risk.

Firms typically progress from exporting, through licensing and joint ventures, to local manufacturing and wholly owned subsidiaries, taking on more commitment and risk at each stage.

Why firms go abroad.

• Slow growth or limited room at home, which drove much Japanese expansion.
• The chance to launch products sooner abroad than at home.
• Host-country import restrictions or local-content rules, which make local production better than exporting.
• Incentives offered by host governments.
• Following customers abroad, as Japanese carmakers' suppliers did when the carmakers built plants in the United States.
• Access to raw materials or technology.
• Before entering, firms weigh the market's size (GNP), population growth, competitors' activity, and whether to produce at home or abroad.

Four international strategies. Building on Christopher Bartlett and Sumantra Ghoshal (Managing Across Borders, 1989), textbooks classify them by two pressures: for cost reduction (global efficiency) and for local responsiveness (adapting to each country's tastes, rules and channels).

An illustration. A pump maker selling one standard design everywhere on price is global. A snacks firm changing recipes and pack sizes for each country is multi-domestic. A software firm selling its Indian product abroad almost unchanged is international.

Don't confuse the international strategy with internationalisation. Internationalisation is the whole process of going abroad. The international strategy is one cell of the grid: low pressure on both cost and local responsiveness, so the firm exports what works at home.

Where it breaks. Many firms skip stages. Software and online businesses often sell abroad from their first year, and are called born-global firms. The grid also simplifies: one firm can standardise components globally while adapting its advertising locally. The transnational ideal is hard to manage, because it asks for global efficiency and local freedom at once.

For exams. Expect a two-pressure grid: name the strategy for a given pair of pressures. Remember the entry ladder and that risk and control rise together.

Go deeper for practitioners

Learning by stages. The Uppsala model (Jan Johanson and Jan-Erik Vahlne, 1977) explains the ladder. Firms know little about foreign markets at first, so they commit a little, learn, and then commit more. They also tend to start with markets that feel close in language, culture and business practice.

A decision. The pump maker's Kenyan sales have grown for three years. A local plant would cut freight and meet local-content rules, but ties up capital. A joint venture with a Kenyan distributor sits in between. The right step depends on how sure the firm is that demand will last.

Links. International marketing (Unit 7) covers how the marketing mix is standardised or adapted abroad.

Global, multi-domestic, international, transnational.

A family group in Pune runs three units: a fast-growing EV-parts unit, a steady forging unit and a textile mill that loses money every year. Treating all three alike would be a mistake. It may need to grow one, hold one and shrink or sell the third.

Firms retrench when they are doing poorly, when stakeholders press for better performance, or when better opportunities lie elsewhere.

The textile mill, as an illustration. It loses ₹6 crore a year. First the group tries a turnaround: a new manager, fewer product lines, lower power costs. If losses continue, it divests: it sells the mill as a running business to a textile firm. If no buyer comes forward, it liquidates: it closes the mill and sells the land and machines. Meanwhile it may harvest an old forging product: no new investment, just its cash while it sells.

What drives divestment: negative cash flow, sustained losses, poor fit with the core business, a better use for the assets, an obsolete offering, rising costs, or a small, static market share. It often follows a failed turnaround. Liquidation treats the unit as a failure, after heavy losses, obsolete assets or technology, a failed strategy or poor management.

Combination strategy mixes stability, expansion and retrenchment, either at the same time in different units or in sequence over time. The family group that grows EV parts, holds forging steady and retrenches textiles is following one. William Glueck listed the possibilities:

• stability in some areas and expansion in others;
• stability with retrenchment;
• retrenchment with expansion;
• all three in different parts of the company;
• still more options when the changes are phased over time.

It suits large, multi-industry firms in fast-changing environments; firms whose products are at different stages of the life cycle, or whose divisions perform unevenly; and diversified firms in a recession.

Don't confuse divestment with liquidation. Divestment sells a unit as a running business, and the buyer carries it on. Liquidation ends the business and sells its assets piece by piece. Harvest is different again: the firm keeps the unit for now and draws cash from it before leaving.

Where it breaks. Cutting too deep can remove the skilled people a recovery needs, and staff who remain may lose morale. Managers who wait too long can see a business that could have been turned around end up liquidated.

For exams. Match the response to the crisis: turnaround for minor, divestment for moderate, liquidation for serious. Know Glueck's four grand strategies: stability, expansion, retrenchment and combination.

Turn around, divest, harvest, or liquidate; or combine.