Complex Business Structures: Alliances, Joint Ventures and Supply Chains

A Nigerian food company wants to enter the Ghanaian market. It could build its own factory in Accra, buy a Ghanaian competitor, form a joint venture with a local distributor, or sign an alliance under which a partner makes and sells its products under licence. It already has a food-processing division, a packaging subsidiary, a 40% stake in a cold-chain venture and long-term contracts with farmers who supply its raw materials.

This is a complex business structure: a mixture of wholly owned units, partly owned ventures, partners and suppliers, each with its own owners, objectives and information. Planning the strategy of such a structure is harder, controlling it is harder still. Measuring its performance is hardest of all, because much of the activity lies outside the company’s direct control.

This topic explains the levels of planning and the strategic planning and control process; the strategic choices (basis, direction and method of growth) including acquisition, joint ventures and alliances; how strategic options are evaluated (suitability, feasibility, acceptability); the problems of measuring strategic performance; and performance measurement in joint ventures, alliances and supply chains. It builds on the earlier topic on value chain analysis for performance management. The next topic covers the performance pyramid.

Strategic planning and control in a complex structure

Levels of planning

Planning is hierarchical, linking strategic planning at the top with detailed operational planning at the bottom. R N Anthony identified three levels:

• Strategic planning: identifying objectives and the plans to achieve them, mostly over the longer term; it includes corporate strategy (what business to be in), business strategy (how to compete) and functional strategy.
• Tactical planning: shorter-term plans for medium-term objectives; the annual budget is an example, a step towards the strategic aims.
• Operational planning: detailed planning of activities, usually by supervisors and junior managers, for short-term targets, such as dividing the day’s workload.

Strategic planning and control

Strategic planning and control is the continuous process of identifying the goals and objectives of the entity; planning strategies to achieve them; setting targets for each strategic objective; converting strategies into shorter-term operational plans; implementing the strategy; monitoring actual performance; and taking control action when it falls below target. It also includes re-assessing plans and strategies when circumstances change. A formal process:

• clarifies objectives and helps managers to make strategic decisions;
• forces managers to think about the future (companies are unlikely to survive unless they plan ahead);
• establishes targets and co-ordinates objectives from the mission statement at the top down to operational targets;
• provides a system for checking progress.

But plans must stay flexible. Strategic plans typically cover five years or more and rest on assumptions about the environment. The environment can change quickly and unexpectedly, creating threats and opportunities, and the company should respond, which may mean abandoning old strategies.

Strategic planning in practice is a mixture of formal planning and new strategies when significant changes occur; responding to the unexpected with something not in the formal plan is sometimes called “freewheeling opportunism”.

Overview of the process

1. Mission and objectives: the purpose of the entity, consistent objectives (for example maximising shareholder wealth), targets, and account of stakeholders’ interests and power.
2. Strategic analysis: environmental analysis of external factors (political, economic, social, technological, ecological and legal: PESTEL; Porter’s five forces) to find opportunities and threats; and a position audit of internal strengths and weaknesses (products, customers, management, skills, systems, reputation, liquidity), using tools such as financial analysis, benchmarking, the product life cycle, the BCG matrix and value chain analysis.
3. Corporate appraisal: SWOT analysis (internal strengths and weaknesses; external opportunities and threats) and gap analysis, which compares the strategic targets with the results expected if no new strategy is followed; the gap shows what the new strategies must achieve.
4. Strategic choice and evaluation.
5. Implementation (change and project management) and review and control through management information systems.

Strategic choice, evaluation and performance in partnerships

Strategic choice

• Basis of strategy (how to compete): Porter’s cost leadership or differentiation, with a broad focus or in a niche.
• Direction (which products to which markets): Ansoff’s grid: market penetration (existing products, existing markets: low risk); market development (existing products, new markets); product development (new products, existing markets); and diversification (new products, new markets: high risk, more so if unrelated).
• Method (how to grow): internal (organic) growth; acquisition or merger; joint venture or strategic alliance.

Methods of growth

• Organic growth: keeps control and avoids integration problems, but is slow and uses the firm’s own resources and know-how.
• Acquisition or merger: fast access to markets, capacity and skills; but the price may be high, integration is difficult, cultures clash, and evidence suggests that the main beneficiaries are often the shareholders of the acquired firm.
• Joint venture: two or more parties share ownership and control of a venture, usually a separate entity, contributing capital, skills or market access and sharing profit and risk. Useful for entering foreign markets (local knowledge, regulatory acceptance), for large or risky projects and for gaining skills. Risks: disagreement between partners, shared control, different objectives and cultures, leakage of know-how, difficulty of exit.
• Strategic alliance: a contractual arrangement (licensing, distribution, joint marketing, shared research) without a new entity or merger; it is flexible and cheaper and ties up little capital, but gives less control, creates dependence, shares know-how, and may be ended by the partner.

Evaluating strategic options

Johnson and Scholes suggested assessing a strategy for:

• Suitability: does it fit the aims, resources and competences of the company and its environment? Does it exploit strengths, correct weaknesses, neutralise threats, seize opportunities, satisfy goals, close the gap and give competitive advantage?
• Feasibility: can we afford it? Do we have the labour skills, product quality, cost level, marketing skills and raw materials?
• Acceptability: is it acceptable to key stakeholders (owners, lenders, employees, customers, regulators)? A strategy that a key stakeholder will not accept is inappropriate. Return, risk and the stakeholder reaction are the usual tests.

Problems of measuring strategic performance

Measuring strategic performance is difficult because of:

• Alignment and relevance: metrics may not be linked to the strategy, may ignore the real input-output relationship, or be so many that selection and use are hard; key performance indicators may be poorly defined.
• Data: information may be poor in quality and inaccurate.
• Leadership and behaviour: poor leadership, resistance to change and a short-term focus rather than long-term objectives.
• Resources and innovation: lack of resources and of innovation where attention is on short-term goals.

Typical metrics: productivity, quality of service and production, and profitability.

Performance in joint ventures, alliances and supply chains

In a complex structure, performance depends partly on parties whom the company does not control. Issues:

• Different objectives of partners (one wants profit, another market access or technology); measures must reflect an agreed purpose.
• Shared control and limited information: the partner may not supply data, so measures and reporting rights should be written into the agreement.
• Which measure for the partner’s stake: return on the investment (share of profit ÷ capital invested), cash received (dividends) and strategic benefits (market access, learning), compared with the alternative use of the capital.
• Goal congruence and trust: joint KPIs, joint targets, open-book arrangements and clear rules for transfer prices and cost sharing.
• Control by the group: in a group, central control must be balanced with divisional autonomy; monitoring has a cost, as discussed in the topic on divisional performance.
• Supply chains: a chain of suppliers, producers, distributors and customers. Typical measures are on-time-in-full (OTIF) delivery, order lead time, inventory days, the cash operating cycle, cost to serve, supplier quality (defect rate), supplier reliability, flexibility and responsiveness to demand changes. Collaboration (shared forecasts, joint planning) reduces stock and waste. Performance should be measured for the chain as a whole, not only for each member, since one member’s saving can raise another’s cost.
• Balanced scorecard and benchmarking help: financial, customer, internal process and learning measures can be set for the partnership; benchmarks can be internal, competitive or operational, though league tables can lead to gaming and unfair comparisons when conditions differ.

Layouts for strategic evaluation and partnership measures

1. Options: list the strategies and score each against suitability, feasibility and acceptability (weights if given).
2. Partnership return: share of profit ÷ capital invested; dividends received; compare with the alternative return.
3. Supply chain measures: OTIF = orders delivered on time and in full ÷ orders; inventory days; cash operating cycle.
4. Compare with last year, target and benchmark.
5. Comment on control, objectives and information.

Money is in naira (₦m); percentages to one decimal place; each answer is rounded once, at the end.

Worked examples

1. Organic growth:
   0.40 × 7 + 0.35 × 8 + 0.25 × 9 = 2.80 + 2.80 + 2.25 = 7.85.
2. Acquisition:
   3.60 + 1.75 + 1.50 = 6.85.
3. Joint venture:
   3.20 + 2.45 + 1.75 = 7.4.
4. Comment. Organic growth ranks first, mainly because it is feasible and acceptable, though slow; acquisition fits best but is hard to finance; a joint venture is a sound compromise if control can be agreed. The scores are judgements and should be tested with sensitivity to the weights.

1. Share of profit:
   30% × 180 = ₦54m
   return on investment 54 ÷ 300 = 18.0%.
2. Cash received:
   30% × 90 = ₦27m, a cash yield of 9.0%.
3. Comment. The accounting return (18.0%) is above the 15% alternative, but only half of it arrives as cash. The rest is retained in a venture the company does not control, so the dividend policy and the partner’s plans matter. Strategic benefits (market access, learning) should be added to the numbers.

1. OTIF:
   4,350 ÷ 5,000 = 87.0%, down from 91%.
2. Cash operating cycle:
   38 + 40 − 45 = 33 days, against 33 + 40 − 45 = 28 days last year.
3. Comment. Service has fallen, stock has risen and the supplier’s quality has worsened: a likely cause is poorer supplier performance, which creates delays and rejected deliveries that are covered by extra stock. The chain needs joint action with the supplier (shared forecasts, quality targets), not only internal cost cutting.

Expect variants: a case for a group with a joint venture and an alliance, a requirement to evaluate a proposed strategy for suitability, feasibility and acceptability, a requirement to suggest measures for a partnership, and discussion of problems of measuring strategic performance.

Common mistakes

• Confusing the levels of planning: the budget is tactical.
• Mixing up basis, direction and method of strategy.
• Evaluating a strategy by profit alone and omitting feasibility and acceptability.
• Treating a joint venture like a wholly owned subsidiary: control is shared.
• Measuring each member of a supply chain separately.
• Listing measures without agreement on data or ownership.

Quick revision

• Strategic, tactical, operational. Process: objectives, analysis, appraisal, choice, evaluation, implementation, review.
• Choice: basis (cost leadership, differentiation); direction (Ansoff); method (organic, acquisition, joint venture, alliance).
• Evaluation: suitability, feasibility, acceptability.
• Partnerships: shared control, different goals, limited data; joint KPIs; chain-wide measures.

How the marks are earned

• Process and criteria stated correctly.
• Calculation of returns and supply chain measures.
• Discussion of control and information problems.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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