Constructing a successful strategic alliance in India

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Constructing a successful strategic alliance in India

By Jon te Boome

University of Groningen

Faculty of Economics and Business

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Abstract

This study researches possible entry modes and partners and how this can maximize the value in entering the Indian whey market. This paper tries to lift the veil on valuation by clearing up step-by-step, how to maximize value by recognizing and considering the entry mode and partner choice drivers of value and implement them into the value framework of Koller et al., (2005). In order to achieve this, the relations between the value drivers of fundamental value and the relevant variables of entry mode and partner choice are explained in detail and applied to the case. Based on theory and the qualitative and quantitative data available, the best entry mode and partnership choices are identified.

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1 Introduction

This research will focus on company D, which is currently considering to undertake a strategic alliance in India.1 The alliance should fit the company’s strategy to strengthen its position as a global player in the field of ingredients for value-added whey products. A strategic alliance is here considered and seen as an agreement between two or more organizations to cooperate in a specific business activity, so that both benefits from the strengths of the other and gains therefore competitive advantage. In this case both joint ventures and acquisitions are considered alliance forms.

The subsequent sub-sections will highlight D’s mission, products, competitors, buyers and other stakeholder issues, after which the field of research, problem statement and the research question will be outlined.

1.1 Background

Section 1.1 and 1.2 contains confidential information. The company’s mission, products, competitors, buyers and other stakeholder issues are therefore only partly outlined in this

confidential version.

Whey is the serum or watery part which is separated from the curd after milk is coagulated for cheese making. It contains milk sugar, whey proteins and a minor amount of fat and other soluble constituents of milk. Because of its food value, whey is used in dry and concentrated form to be mixed with food and feed (Gupta, 2007). As a rough guideline, 1 kg of cheese requires 10 kg of milk to generate 9 kg of whey. In order to maximize the overall profitability of cheese, the proteins and lactose parts in the whey are often further processed, in order to create value added products. As a result whey products can be separated in three categories:

Mainstream, Semi-specialties, and Specialties.

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In total 4 million metric tonnes (MT) whey is processed in the world. The EU accounts for 45%, the US for 23% and 32% of the whey is produced in the rest of the world. Table 2 will provide some general information on the global whey market.

Product segment Volume in MT (2007) CAGR 2006-20102 Product category

Whey powder 2.3 million 1% - Mainstream

Lactose (including permeate)

1.2 million 4%

Whey Proteins 0.5 million 7%

- Semi-specialties - Specialty

Total 4.0 million

Table 1 - World whey market. (Source: 3A Business Consulting, 2007)

1.2 Problem statement and research question

The business challenge for D is to create additional profitable net sales, by increasing its foreign and domestic activities. In order to reach this goal, D intends to accelerate growth in existing emerging markets and enter into new emerging markets like India.

In order to reach this, the following research question and sub-questions are formed:

Research question:

Which entry mode and partner maximizes D’s value in entering the Indian whey market?

Sub-question 1:

What are key “industry” success factors for value creation?

Sub-question 2:

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CAGR= Cumulative Average Growth Rate

Mainstream Semi-specialties

Specialties

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How do entry mode and partner characteristics influence the value creation?

Sub-question 3:

Which critical factors and competitive advantages influence the choice of entry (mode) for D in the Indian whey market?

Sub-question 4:

What are specific factors identifying the partner choice and which Indian partner(s) would be most suitable for D to maximize value creation?

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2 Theoretical framework

In this chapter various scientific theories will be gathered, analyzed and discussed. Section 2.1 will focus on value creating models, section 2.2 and 2.3 discuss and analyze entry mode and partner choice issues. These entry mode and partner choice issues may contribute to changes in the value of an investment opportunity and change the value of a company in particular. The choice of possible entry modes and partners may thus change the value in entering a foreign market and is therefore of crucial importance to this study.

2.1 Value creation model

Just like other publicly traded companies D has a stated aim of creating value for its shareholders. Therefore it is important to analyze these valuation processes.

Koller et al., (2005) is frequently hailed by professionals and academics as the single best valuation guide of its kind, as their framework provides crucial insights in how to measure, manage, and maximize a company’s value. The framework of Koller et al., (2005) is broadly used to estimate the value of alternative corporate and business strategies.3 An important shortcoming of the framework of Koller et al., (2005) is the “partial” negligence on entry mode and partner choice issues. Their framework provides only a general perspective on alliances and their influence on risk and return, while other entry modes are not discussed at all. In order to address this shortcoming, this study will try to lift the veil on valuation by integrating entry mode and partner choice issues into the value framework of Koller et al., (2005).

Brealey et al., (2001) state that the most common method to quantify and compare value is the NPV method. NPV is the Net Present Value of present and future cash flows minus initial investments. The net present value rule states that managers increase shareholders’ wealth by accepting all projects that are worth more than they cost. Accordingly, Koller et al., (2005) state that the key of forecasting future performance and fundamental value is developing a point of view on how the company will perform on the most important value drivers: the Return On Invested Capital (ROIC), relative to the cost of capital, and the rate at which the company is growing its revenues, profits and capital base (growth).

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Value driver 1: ROIC is a profit measure that quantifies how well a company generates cash flows, relative to the capital it has invested in its business. The following two definitions, relating to ROIC, will also be used in the conceptual model later on.

ROIC as such is not informative in this respect; it is the ROIC relatively to the weighted average cost of capital (WACC). WACC is the minimum return that a company must earn on its existing asset base to satisfy its creditors, owners, and other providers of capital. WACC is closely related to risk. If risk specifically relates to a project it is unsystematic risk and will not affect the WACC. However, if risk is systematic it will affect the WACC (Brealey et al., 2001).4 WACC is used as a discount rate to convert expected future free cash flows into present value for investors.5 If a project is not average, the WACC can still be used as a benchmark; the benchmark is adjusted up for unusually risky projects and down for unusually safe ones (Brealey et al., 2001). Taking this into account, if the Return on Invested Capital of a company exceeds its Weighted Average Cost of Capital, then the company generates positive net cash flows, and “economic” value is being created. If ROIC < WACC, the company generates negative cash flows, implying that the asset is not able to generate “economic” value for the company (Koller et al., 2005).

The second value driver to forecast future performance and fundamental value is the growth (rate) of a company. The growth rate of a company is the product of its return on new capital and its investment rate (net investment divided by operating profits) (Copeland et al., 2000).

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Systematic risk is risk that cannot be diversified away because it is the risk of movements in the overall market or in the relevant market segment. Even with a perfectly diversified portfolio there is some risk that cannot be avoided and this is the systematic risk (Eiteman et al., 2004 and Brealey et al., 2001).

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Cash flow is a measure of a company’s health and equals cash receipts minus cash payments over a given period of time (Koller et al., 2005).

ROIC= after tax operating profit margin x capital turn over ratio 1. Operating (Profit) Margin

Measures how effectively the company converts revenues into profits (operating profits/sales).

2. Capital turnover:

Measures how effectively the company employs its invested capital. The higher the ratio is the more efficiently a company is using its capital (revenues/invested capital).

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Growth: if the ROIC on new invested capital is greater than the WACC used to discount the cash flow then higher growth will create greater value (Copeland et al., 2000).

By taking the 2 value drivers of future performance and fundamental value into account, it is now possible to provide a conceptual model of the core components of this research and their assumed relations. Figure 3 shows how to measure value; taking the entry mode and partner choice issues and their influence on competitive advantages into account.

Figure 2 - Conceptual model

Box 1:

Box 1 quantifies how well a company generates cash flows, relative to the capital it has invested in its business (arrow F); value driver 1. ROIC (relatively to WACC) will also influence the second value driver “growth”.

Box 2:

A large body of research e.g. Anderson and Gatignon (1986) and Root (1994) argue that each entry mode and partner choice affects future decisions and the fundamental value of a company differently due to its risk and return characteristics; arrow E represents this link.6

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Arrow D represents the link between the entry mode/partner choice and their influence on competitive advantage. Section 2.2 and 2.3 will elaborate further on entry mode and partner choice issues.

Box 3:

In order to earn returns, in excess of its opportunity cost of capital, companies need to develop and exploit competitive advantages because without a competitive advantage competition would force all the companies in the industry to earn only their cost of capital (or even less) (Porter, 1985, 2003 & Koller et al., 2005).7 In order to obtain or sustain a strong competitive position in the market, a firm must find a way to achieve competitive advantages over its competitors.8 Figure 4 points out that a competitive position is created by using resources and capabilities in order to achieve either a lower cost structure or a differentiated product. Achieving such a cost or differentiation advantage is according to Porter (1985 and 2006) a central component of the firm’s competitive strategy.

Figure 3 - A model of competitive advantage. (Source: Porter, 1985, 2006)

Resources are firm-specific assets while capabilities submit to the firm’s ability to utilize its resources effectively. Together they form a company’s distinctive competence which may result in creating a cost or differentiation advantage. Mc Grath and Tsai (1996) and Porter (1985, 1998 and 2006) state that differentiation and cost advantages and its returns are achieved only over the long term when a firm can earn “abnormal” returns for its offerings, and when other firms cannot duplicate the product characteristics, production processes, and

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The opportunity cost of capital deals with the expected rate of return given up by investing in a project (Brealey et al., 2001).

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The competitive position of a company is the relative level of dominance a firm has in its market compared to its competitors (Porter, 2003).

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the firm’s capabilities that yield these “abnormal” returns. Accordingly, value creation can occur in one or both of the following ways.

• Cost advantage (efficiency): If a company is able to do things more rapidly, cheaper, or better than the rivals, and when the factors yield this level of efficiency are firm-specific competences, the company has an efficiency advantage (Hippel, 1988). If a company is able to produce at a lower cost, it may be able to attract consumers by selling at a price fractionally below industry equilibrium price; it is thus able to gather “abnormal” returns (Mc Grath & Tsai, 1996).

• Differentiation advantage (value): If a company is able to offer a client a benefit which exceeds the clients’ cost of obtaining that benefit, the company created value for that customer; the firm is able to demand a premium price. To the extent this premium price exceeds the costs to the company required to create the benefit, the company can earn abnormally high returns (Mc Grath & Tsai, 1996).9

The discussion above only focused on two types of competitive advantage but Koller et al., (2005) state that three basic types of competitive advantage translate into a positive ROIC versus WACC spread. The third type is capital efficiency and quantifies how effectively the company employs its invested capital. The more rapidly the capital of a company is used to generate revenues, the more efficiently a company is using its capital. Thus, capital efficiency will translate into a cost advantage. Taking this into account, the following sources of competitive advantage translate into a positive ROIC versus WACC spread.

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Value as a source of competitive advantage (differentiation advantage)

1. Price Premium: Providing superior value to the customer through a combination of price and product attributes that cannot be replicated by competitors. These attributes can be tangible or intangible. Price premium influences the operating profit margin positively (Arrow A).

Efficiency as a source of competitive advantage (cost advantage)

2. Cost advantage: Achieving lower costs than competitors; the lower costs cannot be replicated by competitors and influences the operating profit margin positively (Arrow B).

3. Capital efficiency: Using capital more productively than competitors implies that the efficiency levels cannot be replicated by competitors and influences the capital turnover positively (Arrow C).

2.1.1 Calculating fundamental value

Valuation methods like discounted cash flow models and other investment analysis techniques can help to refine and outline strategic ideas. A Discounted Cash Flow model (DCF) focuses on the cash flows and outflows associated with prospective long-term investment projects (Koller et al., 2005). The decision makers of a company can use DCF models as a tool to examine and calculate whether to accept or reject a strategy or a project. Valuation models are often used to define corporate strategy, buy outs & spin-offs, restructurings and capital budgeting of i.e. entry modes (Eiteman et al., 2004). Figure 5 provides the main contents and structure of a DCF model.

In order to do a valuation, financial statements have to be explicitly forecasted. Historical income statements and balance sheets in combination with other sources of information have to be translated into the future by means of short and long term real and naïve sales forecasts which is a mixture between extrapolations of historical data, qualified guesses and mathematical relationships tied to key ratios (Copeland et al., 2000).

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Since this paper evaluates an investment opportunity in an emerging market, it is important to know how value-based management principles deal with valuation difficulties in emerging markets. James & Koller, (2000) and Koller et al., (2005) argue that it is much more difficult to do valuations in emerging markets because the risks and obstacles that companies face are greater than in developed markets due to macro economic uncertainty, illiquid capital markets, controls on the flow of capital etc. James & Koller (2000) state that yet little agreement has emerged among academics, investment bankers, and industry practitioners about how to conduct valuations in emerging markets. The methods used not only vary but also often involve making arbitrary adjustments based on gut feeling and limited empirical evidence.

2.2 Entry mode

As already discussed in section 2.1, the value creation model of Koller et al., (2005) does not discuss entry modes in detail. Section 2.2 will therefore analyze and discuss how possible entry modes may contribute to changes in the value of an investment opportunity and change the value of a company in particular.

Traditional frameworks that explain firms’ internationalization were formulated already two or three decades ago. These frameworks are used as the theoretical foundation for most of the published entry mode studies and are developed to understand and explain entry mode phenomena (Brouthers et al., 2007). The resource based view, institutional theory, Dunning’s eclectic approach and the transaction cost analysis (TCA) are the most well known traditional frameworks on entry mode selection. This paper uses the same classification of variables as Hill et al., (1990), who state that TCA explanations are of major importance but transaction cost logic alone does not provide all the answers to make the most appropriate entry mode and partner choice.10 TCA is often used as a tool to explain economic problems where asset specificity plays a key role.11 When a party develops an asset (physical or human) specifically for a transaction, the risk is high that another party to the transaction will act opportunistically at the expense of the party that developed the asset. Thus, when asset specificity and the risk

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A transaction cost is a cost incurred in making an economic exchange (Kim and Hwang, 1992).

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of opportunism are high, buyers and sellers will devise contracts that attempt to deal with the potential for opportunistic behaviour (Anderson and Gatignon, 1986).

Decisions to enter an overseas market depend on the entry mode and the chosen partner (section, 2.3) and are believed to be critical determinants of the success a company will reach in the new market (Root, 1994, Killing, 1992 and Davidson, 1982). An entry mode is an institutional arrangement chosen by the firm to operate in the foreign market, with each entry mode having its own specific influence on risk, return and control (Root, 1994). Figure 6 provides a set of characteristics of various modes of entry based on these risks, return and the degree of control characteristics (Kumar & Subramaniam, 1997 and Anderson and Gatignon, 1986).12

Figure 5 – Characteristics of various modes of entry. (Source: Anderson and Gatignon, 1986 and Kumar & Subramaniam, 1997)

The characteristics risk, return and control are discussed in more detail below.

Risk:

Foreign transactional entry mode risks are viewed in terms of the host country’s political and economic stability and the host country’s policies and regulations related to transnational business activities (Rasheed, 2005). Accordingly, Anderson and Gatignon (1986) and Root (1994) argue that the extent of risk a company bears is related to the committed resources.13 The higher the resource commitment, the higher the risks. This risk will as long it is systematic risk affect the WACC. Each entry mode entails a certain degree of resource commitment in order to serve the foreign market. If the level of resource commitment is

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Except for acquisition and Greenfield investments no two modes are alike across the different risk, return and return characteristics. Therefore, in order to bring down the number of entry modes, this study will characterize acquisition and Greenfield investments as setting up a wholly owned subsidiary.

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correspondingly high it is difficult to change from one entry mode to another without considerable loss of time and money (hence risk) (Kumar and Subramaniam, 1997 and Root, 1994).

Return:

Return is the ratio of capital gained or lost on an investment (relative to the amount of capital invested) and is earlier referred to as ROIC. Foreign market entry mode return includes the risk effects of doing business in a foreign target market (Rasheed, 2005 and Root, 1994).

Control:

Control is often considered as an imperative in entry mode literature because it is the single most important determinant of both risk and return (Anderson and Gatignon 1986, Hill et al., 1990 and Kim & Hwang, 1992). Anderson and Gatignon (1986) defined control as the amount of authority over operational and strategic decision making in a foreign operation. Empirical research e.g. Anderson and Gatignon (1986), Hill et al., (1990) and Kim & Hwang (1992) stress that different entry modes imply varying degrees of control.14 High control entry modes can increase both risk and return. Low-control modes (e.g., licensing and other contractual agreements) minimize resource commitment (hence risk) but often at the expense of returns (Hill et al., 1990 and Kim and Hwang, 1992).

Based on prior research, Hill et al., (1990) integrated environmental, strategic and transaction factors into their eclectic entry mode framework. The foundation of this eclectic framework lies in prior research concerning entry modes and control (Anderson and Gatignon, 1986 and Root, 1994), entry modes and resource commitment (hence risk) (Vernon, 1983) and entry mode and dissemination risk (Casson, 1982).15 Table 3 provides these characteristics of the different entry modes.

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Control has a large impact on the company when entering a foreign market because without control it is much more difficult to coordinate actions, and to accomplish and revise strategies (Anderson and Gatignon, 1986 and Hill et al., 1990).

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Entry mode Control Resource commitment Dissemination risk

Exports Medium Low Low

Licensing Low Low High

Joint venturing Medium Medium Medium

Wholly owned subsidiary

High High Low

Table 2 – The characteristics of different entry modes. (Source: Anderson and Gatignon, 1986, Root, 1994, Hill et al., 1990, Vernon, 1983 and Casson, 1982)

In figure 7, the nine entry mode variables of the eclectic model of Hill et al. (1990) and their influence on competitive advantages, WACC and ROIC are outlined.

* Risk will as long it is systematic affect the WACC.

Empirical literature on entry mode selection e.g. Anderson and Gatignon, (1986), Root, (1994), Hill et al. (1990), Kim & Hwang, (1992) do not link entry mode variables to the types of competitive advantage specifically but to the influence on performance (return) in general. Thus, empirical literature does not allow such a detailed discussion.

The transaction specific, strategic and environmental variables, and their influence on risk and return, are described in detail below.

Strategic variables

1. Extent of nationaldifferences 2. Extent of scale economies 3. Global concentration - Construct: Control Environmental variables 1. Location familiarity 2. Demand conditions 3. Intensity of competition 4. Country risk

-Construct: Resource commitment Transaction variables

1. Value of firm specific know-how 2. Tacit nature of know-how

- Construct: Dissemination risk

Entry mode variables

Return Risk Cost advantage Price Premium Capital efficiency Capital turn over Cost advantage Cost advantage Differentiation adv. Operating profit margin R O IC C o n tr o l W A C C Systematic risk Competitive advantage

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Transaction-specific variables:

Transaction-specific variables stress the importance of firm-specific advantages in know-how when explaining the competitive advantage that multinational companies enjoy relative to host country enterprises (Dunning, 1981). Transaction-specific variables influence the choice of entry mode through its impact on dissemination risk and the appropriate level of control (Root, 1994, Hill et al., 1990, Anderson and Gatignon, 1986 and Hill and Kim, 1988). A MNC will not want to see firm-specific know-how disseminated, since that would reduce the return that could be earned from the know-how. The degree of dissemination risk therefore influences the entry mode choice by means of its influence on return (Casson, 1982).

Value of firm specific know-how

If the differential advantage in firm specific know-how is significant, the tendency of licensees and also venture partners to multiply that know-how or use it for their own purposes, in order to create a competitive advantage, is likely to be high (Hill et al., 1990 and Anderson and Gatignon, 1986). Thus, the greater the advantage in firm specific know-how the greater the transaction costs the MNC must bear as an insurance against expropriation and dissemination. The risk-return trade-off of the high control entry mode is in this particular situation more favorable than the return-risk trade-off of the low control entry mode because the transaction costs saving associated with a wholly owned subsidiary will outweigh the costs (resource commitment) and create higher returns (Hill et al., 1990 and Anderson and Gatignon, 1986). Therefore if the differentials in firm specific know-how are great, the greater the chances that an MNC will favor an entry mode like a wholly owned subsidiary that minimizes dissemination risk (Kim & Hwang 1992 and Hill et al., 1990).

Tacit nature of know how

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setting up a wholly owned subsidiary, the MNC can better transfer tacit-know-how and informal routines because the MNC can earn greater returns from its technology because it gives them an enhanced ability to transfer the tacit-know-how and informal routines intact to the host country (Hill et al., 1990). The empirical implication is therefore; the greater the tacit component of firm specific know-how, the more a MNC will favor high-control over low control entry modes.

Strategic variables:

This variable set deals with strategic decisions of a MNC and influences the choice of entry mode through its impact on the amount of control and strategic flexibility (hence risk and return).

Extent of national differences

A multi-domestic strategy is based upon the principle that national markets differ extensively with regard to customer tastes and preferences; each subsidiary has its own marketing function and its own autonomous manufacturing facilities (Hout et al., 1982). The empirical implication is that companies require only a low degree of control if they pursue a multi-domestic strategy because the competitive strategy will vary between nations reflecting differences in competitive conditions. Thus, a firm will favor licensing, exports and joint ventures, since these represent the least resource commitment risk among the different entry modes (Root, 1994).

Extent of scale economies

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wholly owned subsidiary) by which they can control the interdependent subsidiaries (Hill et al., 1990).

Global concentration

Global concentration deals with the number of players confronting each other in national markets; if only a limited number of players confront each other in different national markets, the global market is highly concentrated.16 If the market is highly concentrated than the company is considered to be an oligopoly.17 One feature of global oligopolies is that when MNCs enter a foreign market, they may have strategic objectives that go beyond choosing the most efficient entry mode for that particular market (Hout et al., 1982 and Hill et al., 1990). In order to achieve the strategic objectives that go beyond the most efficient entry, a MNC wants to achieve global strategic coordination over its affiliates and therefore must be controlled by the corporate office (Kim and Hwang, 1992 and Hill et al., 1990). Licensees and joint venture partners are unlikely to accept such conditions. Therefore, the eclectic model of Hill et al., (1990) states that if the need for global strategic coordination regarding pricing strategy, marketing strategy and transfer pricing policy is high (the industry is a global oligopoly), a company is likely to favor high-control entry modes like a wholly owned subsidiary.

Environmental variables:

Environmental variable influences the choice of entry mode through its impact on resource commitments (hence risk).

Location familiarity

The greater the perceived distance for the potential entrant between the home and host country in terms of culture, economic systems, and business practices, the more likely it is that an entry mode involving relative low resource commitment like exports, licensing or to a lesser extent joint venturing will be chosen (Hill et al., 1990). The main argument is that a MNC is unwilling to commit substantial resources to a foreign operation since it would

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In order to measure global concentration a company should take a close look at these concentration measures: industry seller concentration, national/regional hegemony, and industry geographic concentration (Hout et al., 1982 and Hamel and Prahalad, 1985).

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significantly reduce the ability to exit the foreign market if the marketplace should prove unattractive (Hill et al., 1990 and Kim & Hwang, 1992).

Demand uncertainty

Harrigan (1985) argues that a MNC may be unwilling to invest significant resources in a country where the future host country demand is uncertain because it may limit the firm’s ability to reduce excess capacity or exit the country without losing substantial resources. The future demand uncertainty is likely to be greatest if a future host market is in its declining or embryonic stage, whereas demand uncertainty is supposed to be more stable and predictable in mature markets (Vernon, 1979). Thus, if a future host market is in its declining or embryonic stage, empirical entry mode literature implicates that a MNC will prefer a low resource commitment entry mode like licensing or export. However, if a future host market is less uncertain, the MNC is likely to be indifferent between entry modes because the perceived risk of future demand uncertainty is relatively low. Put differently: in a mature market the MNC is better able to identify the optimal capacity necessary to serve the foreign market, therefore other factors than demand uncertainty have to determine the MNCs choice of entry (Hill et al., 1990).

Intensity of competition

This variable looks at the intensity of competition of the foreign local market. Harrigan (1985) and Porter (1990) argue that the nature of competition has a direct impact on the way a MNC undertakes business transactions.18 Harrigan (1985) argues that any reduction in strategic flexibility may be unwise when competition is intense, as this situation may require quick responses and strategic changes from the firm. The committed resources limit a MNCs ability to adapt to changing market circumstances (strategic flexibility) without incurring substantial sunk costs (Hill et al., 1990 and Kim and Hwang, 1992).19 The empirical implication for this variable is therefore, the greater the competitive intensity of the market, the smaller the chance that a company will favor entry modes with high resource commitments (e.g. wholly owned subsidiary) (Hill et al., 1990).

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The intensity of competition is influenced by factors as industry concentration, regulations, subsidies, trade policies (Harrigan, 1985).

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Country risk

Four types of country risk which have a significant effect on the MNC’s entry mode decision are general political risk, ownership/control risk, operations risk and transfer risk (Root, 1987).20 If the (country) risk of a host country is high, an entrant might be well advised to limit the exposure by reducing its resource commitment, in order to be able to leave the country without substantial sunk costs.21 Thus, if the country risk is relatively high, the company will favor entry modes with relative low resource commitments like exports or licensing (Hill et al., 1990).

WACC

Environmental risk is considered to be systematic risk because every company has to deal with this environment. This implies that no differences exist and that it cannot be diversified away. It affects all companies active in that environment (Eiteman et al., 2004 and Brealey et al., 2001). Transaction and strategic variables are considered unsystematic risk because every single company can decide how to design its transactions. An example is the dissemination risk which deals with the risk that firm specific know-how will be expropriated by a partner. Dissemination risk is, in comparison to wholly owned subsidiaries, considerably higher with joint venture and licensing projects. However, it is a firm’s choice how to design the transaction for its knowledge. Therefore this risk can be diversified away and is considered unsystematic risk.

2.3 Partner Choice

Section 2.3 will analyze and discuss prior research on partner choice and its influence on risk, return and control.

There are several factors that affect cooperation, performance and the success of an alliance. However, the partner choice is often seen as an important strategic decision in undertaking an alliance (Brouthers et al., 2007). Alliance types which consist of a partner choice are a joint

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Political risk deals with the political instability of a country. Ownership/control risk is defined as management’s uncertainty about host government actions affecting the entrant’s ownership. Operations risk refers to the possibility of sanctions that could constrain an investor’s operations in the host country. Transfer risk is defined as limitations on the entrant’s ability to transfer capital out of the host country (Rasheed, 2005 and Root, 1987).

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venture agreement and an acquisition (Brouthers et al., 2007).22 The selection process of a partner entails an evaluation of the partners’ characteristics because a partner whose strengths meet the primary needs of the venture and which is complementary to the primary needs of the partner company is able to enhance value (Geringer (1988 and 1991). Thus, the need for partners' complementary skills and resources is a primary motivation for the formation of alliance arrangements because each partner will have different cooperative objectives and abilities to appropriate alliance benefits (Hamel, 1991). Other strategic reasons for forming cooperative relationships, in the broadest terms deal with risk reduction, cost reduction, and an ability to enter markets or enhance value (return) in a manner not possible for each firm individually (Clarry, 1990). Accordingly, Das (2001) states that risk and control are inextricably interlinked with performance in strategic alliances.23 The two types of risk affecting the potential returns are; relational risk and performance risk.24 Whereas, the concept control is again seen as an imperative as it is the single most important determinant of both risk and return (Das, 2001).

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Acquisition refers to the purchase of stock in an amount sufficient to exercise control. Joint venturing involves the pooling of assets and (or) knowledge by two or more firms who share joint ownership (Kumar and Subramaniam, 1997 and Root, 1994).

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Acquisitions are often chosen when firms want maximum control and are willing to make maximum resource commitment and take on maximum risk. With a joint venture the parties agree to create a new entity by both contributing resource commitments (hence risk), and share in the returns, costs and control of the enterprise (Kumar and Subramaniam, 1997).

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3 Analysis

In this chapter the impact of how possible entry modes and partners can maximize D’s fundamental value in entering the Indian whey market will be analyzed and discussed. Section 3.1 will provide a solid strategic analysis of the external environment (India) and D’s internal situation. Section 3.2 and 3.3 will select respectively the most suitable entry mode and best suitable partner for D to enter the Indian whey market.

3.1 Strategic analysis

The strategic analysis will explain the industry and competitive forces of the Indian whey market, and their underlying causes. Understanding these industry and competitive forces reveals the roots of an industry’s current profitability and for anticipating and influencing competition (and profitability) over time.

3.1.1 Market and industry analysis

This market and industry analysis will explain to which extent the Indian whey industry is attractive by using the concepts of the five-forces framework of Porter (2006). This involves a relationship between competitors within an industry, potential competitors, suppliers, buyers and alternative solutions to the problem being addressed.

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However, the low labor productivity levels may have negative capital effects (cost-disadvantage).

Indian dairy industry:

An important feature of the Indian dairy market is that India emerged from chronic shortages of milk, to the largest milk producer in the world (Gupta, 2007). India today produces around 15% of the milk used globally (Rabobank, 2007). The growth of processed products in India, including dairy and whey products, is presently driven by a growing young population and an increasing consumer base (Rabobank, 2005). Table 4 provides some key facts concerning the Indian dairy market:

Table 3 - Indicators of India’s dairy development. (Source: Data monitor, 2007, Rabobank 2005, 2007).

Dairying is a rural based activity which is widely spread across India. The country has a unique pattern of milk collection and production; no large milk-producing country has a similar system (Rabobank, 2005). Approximately 70 million households (primarily small and marginal farmers and landless laborers) are engaged in milk production, from which over 11 million farmers are organized into about 100,000 village Dairy Cooperative Societies (DCS) federated under 176 District Unions in 17 State Federations (Gupta, 2007).25 The bargaining power of the(se) suppliers (farmers) is relatively low because the dairy market is (still) extremely fragmented and farmers are often too small to exert power on for example milk collection centres. Gupta (2007) states therefore that the farmers capture less of the value for themselves as they cannot pressure the milk buyers by charging higher prices or by switching their costs to industry participants.

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Although the milk procurement system is now partly centralized and professionalized it is still highly fragmented as only about 35% of milk produced in India is processed (Rabobank, 2005).

Indicators Characteristics India

Human population in 2006 1.101 million (70 million dairy farmers)

Milk production in 2006 100 million tonnes/year

cow milk: 41%; buffalo milk 55%; and goats, etc 4%

Percentage milk processed Organized sector 13 % (relative large plants)

Unorganized sector: 22 % (relative small plants), total 35% Dairy market total revenues 2006 _€_{13,569.3 million}

Expected total revenues dairy 2011 € 18,520.9 million

Compound annual growth rate 2002-2006 Dairy market 12%, milk processing 4% Compound annual growth rate 2006-2011 Dairy market 6.4%, milk processing 4.5%

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Most milk procurement takes place in the north, the so-called “milk rich belt”, resulting in regional differences in milk quantities. General information on regional differences is provided in table 5.

Table 4 - Region-wise distribution. (Source: Gupta, 2007)

Table 6 (below) argues that in comparison to D corporate, the Indian dairy companies are relatively small sized.

The Indian whey market:

Whey in India is separated from cheese, paneer and in lesser importance chhana, casein and shrikhand. A rough estimation is that about one million tonnes of whey is produced annually (Parekh, 2007). In recent years the expenditures on whey products increased faster than the sales volume; implicating price increases. Rabobank (2005) identified this trend as a consumer shift towards more value-added products as a consequence of economic growth and improved living standards. Additionally, forecasts for the Indian whey market are a continuing optimistic demand profile, increasing margins and an increasing availability of raw materials (ERC Group, 2005).

Whey is still processed on a relative small scale due to a lack of technology and machinery required to obtain large-scale production (Rabobank, 2005 and Prasad, 2007). This lack of scale is a significant reason for the inability to invest in procurement infrastructure, quality control and further market development because profits are not sufficient to cover these investments (Gupta, 2007). A good (exclusive) distribution system might also provide a competitive advantage. The distribution system in the Indian whey industry is not very well

Population in million in 2007 (percentage of total)

Milk production in million tonnes in 2007

(percentage of total)

Per capita availability in grams/day in 2007 (percentage of all-India

average

Northern region 330.3 (30.0%) 46.8 (46.8%) 355 (+53.6%)

Western & central region 246.6 (22.4% 21.7 (21.7%) 219 (-05.2%)

Southern region 240.0 (21.8%) 20.1 (20.1%) 208 (-10.0%)

Eastern region 284.1(25.8%) 11.4 (11.4%) 99 (-57.1%)

Total 1101 (100%) 100 (100%) 231

Annual turnover of India’s top 5 dairy companies- million (€) 2003-2004

No. Company Dairy Sales Ownership

1 Gujarat 420 Cooperative

2 Nestlé (India) 160 Multinational

3 Mother Dairy 140 Cooperative

4 Hatsun Agro 58 Public

5 Dynamix 51 Private

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organized, although the retail sector is developing rapidly and also slowly getting more organized (Gupta, 2007). Since quality and reliability are often poor, opportunities exist in improving standards by taking better care of the milk procurement and infrastructure and creating strong and long-term buyer-supplier relationships in order to exploit a cost advantage and/or a differentiation advantage. In addition, D’s firm specific competences might enable them to utilize whey more effectively, improve procurement and infrastructure standards, improve quality, reliability and increase the added value of the processed products.

Products performing the same function as whey products are often defined as substitutes. The world property organization (WIPO), patent number, WO/2005/115176, argues that whey substitutes are mainly focused on protein and lactose substitution. Protein and lactose sources performing the same or a similar function as whey products are soy, malto-dextrines, sucrose and starch. WIPO states that these substitutes do not have a substantial impact on sales of the whey products, mainly due to the advantage of whey having the vitamin/mineral balance inherently present in the product. Still it is important to notice that especially the soy market is showing double digit growth and could pose a threat on (global) whey sales in the future.26

Buyers of whey products in India can be divided in companies operating on the infant food market and in the pharmaceutical business.

1. The infant food market is primarily dominated by two companies (Gujarat and Nestlé). Together they have a market share in value of over 93% (see table 7). Other producers are Wockhardt, Raptakos Brett, FDC, Danone and Abbott, but together they have a value share of less than 7 percent (ERC Group, 2005).

Shares Volume % (Tonnes) Value %

Gujarat 60.2 31.4 Nestlé 33.2 58.0 Wockhardt 3.3 5.4 Raptakoss Brett 2.3 4.2 Other 1.0 1.0 Total 100 100

Gujarat dominates the mainstream infant foods market, whereas Nestlé dominates the specialized sector. These specialty products have a higher value in comparison to the

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mainstream products. This explains the differences in volume and value shares (ERC Group, 2005).27

2. The pharmaceutical sector is highly fragmented and has expanded enormously in the last two decades. The leading 250 pharmaceutical companies control over 70% of the market. However, the market leader holds nearly 7% of the market share.28 The largest pharmaceutical companies in India are Ranbaxy Laboratories, Cipla, Dr Reddy’s Laboratories, Glen mark Pharmaceuticals, Wockhardt Ltd and Orchid Chemicals.29

Gupta (2007) argues that large volume buyers in the infant food market like Nestlé and Gujarat have considerably more bargaining power over its vendors than other vendors in the “fragmented” pharmaceutical market. Large volume buyers like Gujarat and Nestlé are powerful because they have negotiating leverage relative to industry participants. This can be explained by the relative high market shares of Gujarat and Nestlé, the lower shifting costs in changing vendors and the fact that products are more standardized and undifferentiated in the infant food market (Gupta, 2007). Thus, Gujarat and Nestlé can capture more value by forcing down prices, demanding improved quality or more service (thereby driving up costs), and in general playing industry participants off against one another, all at the expense of industry profitability.

Until recently the Indian government exercised a protectionist policy, by prohibiting imports of many food products, including whey products, but since 2001, import bans have been lifted (ERC Group 2005). Imports, however, are still effectively blocked by high import duties. Import tariffs for whey products vary between 30% and 60%; the duty applied depends on their usage.30 These (high) import tariffs make exporting to India unattractive for a company like D because the imported whey products are much more expensive than their local equivalents. Since the market opened up to foreign companies, more of them are analyzing their opportunities to enter the whey and/or food market (ERC Group, 2005). Several food processing companies “whey ingredient buyers” already entered the Indian market or intend

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to increase their initial stakes (ERC Group, 2005).31 Some tangible examples are Glaxo Smith Kline, Wyeth, Abbott, Mead Johnson, Danone and Nestlé. In general foreign dairy and whey entrepreneurs provide key upstream resources like technology and product/manufacturing know-how, while local partners provide more downstream resources like distribution and specific market knowledge (Gupta, 2007).32

In order to analyze which global competitors are most likely to enter the Indian whey market, it is of crucial importance that the main global competitors are segmented by product scope and the geographical focus of the business (figure 8). The determinant product scope is of influence to the level of price premium a company can charge for its products. The higher the product scope of a company, the more likely it is that they can provide superior value to a customer through a combination of price and product attributes. The determinant geographical focus: A company is considered domestic if they only generate sales on their home market. A company is considered international if they generate sales outside their home market mainly by means of exports or so at arms length. A company is considered “global” if sales outside the home market accounts for more than 40% of total sales; often including local production.

Geographical focus Key competitors

Domestic International Global

High None Carberry

Murry Goulburn

Fonterra Arla Foods DMV/Campina Friesland Foods Domo

Medium Alpavit Ingredia

Lacto Serum Meggle Hilmar Ingred. Leprino Valio Hanssen Armor Proteines Lactalis Davisco Glanbia Milei/ Morinaga Kerry ingredients P ro d u ct s co p e (p ro d u ct p o rt fo li o , v al u e ad d ed ) P ri ce p re m iu m Low Agrimark

First District Ass. Swiss Valley Firms

Volac Int. Proteint

Vitalus Euroserum

Biopole

Figure 7 - Scope and geographical focus of key global whey ingredients producers. (Source: 3A Business consulting, 2007 & Annual reports)

31

The Indian government recently started supporting foreign investment in the dairy sector and several state governments are actively scouting for interested (foreign) parties (Rabobank, 2005).

32

The foreign dairy entrepreneurs add a great deal of diversity to the dairy industry technological know-how, milk procurement and quality issues (Gupta, 2007).

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Manufacturing high value added whey ingredients requires highly specialized technology, plants and equipment. Investments made to these particular transactions often incur a high extent of asset specificity (3A Business Consulting, 2007). In addition, D’s proprietary knowledge is patented. This allows them to be the sole producer for an extended period of time and prevents others from using D’s firm specific knowledge. Both, asset specificity, patents and proprietary knowledge strengthens D position and inhibit additional rivals from entering the market and may influence the profitability of the whey-industry and D positively. As a result, companies with a low and to a lesser extent medium product scope, will not have the firm specific resources and capabilities to make value added products. Therefore it is assumable that their entry into the market will drive the profitability of the industry down to a small extent.33 However, global whey producers with a high product scope like Fonterra, Arla Foods, DMV, Friesland Foods Domo, Carberry and Murry Goulburn are likely to have almost the same competitive advantages as D. These whey producing competitors will therefore have the biggest impact on the whey-industry and D’s profit potential. Additionally, due to the relatively favorable conditions and profit potential of the market it is likely that more global and local whey producers will enter the Indian dairy and whey market in the near future (ERC Group, 2005).34

The intensity of competition between existing firms in the relatively new whey market is not as fierce as on the Indian dairy market but is expected to intensify in the future. The competition between the industry’s participants is considered to be disciplined (Gupta, 2007). Only a limited amount of companies are operating on the Indian whey market producing mainly mainstream products (Gupta, 2007). The market for specialized products is still untapped but more and more whey producing companies shift towards a more differentiation orientated strategy in order to meet demand and increase their profitability (Rabobank, 2005).

3.1.2 Competitive position D

This section contains confidential information and is only outlined in the full (confidential) version.

33

Other potential (new) entrants are: Indian cheese manufacturers and other food and dairy companies but these companies have a lack of know-how and experience in the whey market. They could enter the market by integrating their production process backward/forward and produce the whey products themselves.

34

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3.2 Entry mode variables

In this section the nine entry mode variables (discussed in section 2.2) of the eclectic model of Hill et al. (1990) are applied to the D case. The model will be used to compare different entry modes on risk and return and select the entry mode with the highest expected rate of return at a given risk level. As argued in section 2.2, empirical implications do not allow a detailed discussion on cost and differentiation advantages concerning entry mode variables. However, in this section it is tried to link a number of entry mode variables to the 3 sources of competitive advantage.

Transaction variables:

Value of firm specific know-how

Section 3.1 pointed already out that D has high levels of firm-specific know-how (upstream resources) like technology and product/manufacturing know-how, while the Indian whey producers in general provide downstream resources like distribution and market knowledge. Because firm specific know-how is one of the major assets of D, the transaction costs which D must bear as an insurance against expropriation and dissemination will be significant. Thus, the transaction cost savings of a wholly owned subsidiary or exports will outweigh the costs (resource commitments) and create higher returns. The export and wholly owned subsidiary entry mode are therefore most suitable to protect and exploit D’s differential advantage in know-how.

Tacit nature of know-how

D’s know-how is for a large part embodied in technological blue prints, but it is also embedded in human capital, informal operating procedures, and other firm specific routines (Internal sources). Thus, D’s know-how is often tacit in nature and is difficult to separate for sale via for example licensing because the licensee would most probably lack the informal routines to turn a technological blueprint into a successful product. The empirical implication is therefore that D can earn greater returns from its technology if it transfers the know-how intact to the host country. This variable will therefore favor for D exports or a wholly owned subsidiary over a licensing agreement.

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value to their whey products (capital efficiency, cost advantage and price premium). Thus, a differential advantage in knowledge (firm specific and tacit) might translate in a price premium as well as a cost advantage.

Strategic variables:

Extent of national differences

Maximizing value of a multi-domestic strategy requires that MNCs assign key operating and strategic responsibilities to their autonomous national subsidiaries (Hill et al., 1990). Products and services are adjusted to the consumer tastes and preferences of that local market. Hout et al. (1982) argues that national differences might affect all three sources of competitive advantage. However, adjusting the products to the specific consumer tastes and local preferences might also drive capital efficiency levels down and cost levels up (full cost-disadvantage). Companies pursuing a multi-domestic strategy will therefore favor low control entry modes; since these represent the least resource commitment risk of entering a foreign market (Hill et al., 1990). However, D does not apply a multi-domestic strategy but a global strategy. Therefore, taken the work of Hill et al., (1990) into consideration, it is likely that D will be indifferent between the different entry modes. The empirical implication is therefore that other variables than the extent of national difference variable have to determine the choice of entry mode.

Extent of scale economies

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Global concentration industry

The global industry for high value added whey ingredients for Pharma and Infant foods use is highly concentrated. Only a limited number of players (Fonterra, Arla Foods, DMV and Friesland Foods Domo) confront each other in different national markets around the globe (3A Business Consulting, 2007). This implies that global competitive interdependence exists; the actions taken by D in one market will have consequences for the competitive position of D in other national markets. In order to control these consequences D wants to achieve global strategic coordination, thus the competitive strategy of their national operations should be controlled by the corporate office. As a result, different national operations take directions from the corporate office, regarding to pricing strategy, marketing strategy, and transfer pricing policy. Licensees or venture partners are often unlikely to accept such conditions. The empirical implication is therefore that D will favor a wholly owned subsidiary.

Environmental variables:

The traditional framework of Porter (1990) argues that national differences might affect all three sources of competitive advantage due to differences in national values, culture, economic structures, institutions and history.

Location familiarity

Distance and differences between D’s home country and the host country (India) concerning culture, economic systems and business practices seem to be evident. Already, three decades ago Johanson and Vahlne (1977) stressed out that location, familiarity and market commitment affect resource commitment and the way activities of MNCs are performed. The knowledge about the Indian whey market can therefore be considered as a resource; the better the knowledge about the Indian market, the more valuable the resources and the commitment are to the market. The location familiarity of India for D is relative low; D will therefore favor an entry mode with relative low resource commitment. The low resource commitments will enable D to exit India more easily if the Indian market proves to be unattractive. Consequently, the company will favor exports, licensing, and / or joint ventures, as opposed to wholly owned subsidiaries.

Demand uncertainty

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(2007) argues that the Indian whey industry, considering the product life cycle, is in a transition from the introduction to the growth phase. Thus, demand conditions are relative stable and predictable.

Harrigan (1985) states that MNCs favor low resource commitment when demand uncertainty is high (e.g. licensing or exporting) because MNCs do not want to invest heavily in that country as it may limit them to exit the market without losing substantial resources. Nevertheless, the eclectic model of Hill et al. (1990) argue that if demand conditions are, like in this case, optimistic, it does not imply that D will have a preference for a particular entry mode even though the perceived risk of future demand uncertainty is relatively low. The empirical implication is therefore that, other factors than demand uncertainty should determine D’s entry mode choice.

Intensity of competition

The intensity competition is disciplined and there are only a limited number of competitors. However, the Indian market is liberalizing and entry barriers are fading; many newcomers are entering the dairy industry and competition is becoming tougher day by day (Gupta, 2007). Harrigan (1985) and Porter (1990, 2006) stress that if competition in a market is intense, markets tend to be less profitable, due to a reduction of achievable price premiums and cost advantages. High intensity levels of competition do therefore not justify heavy resource commitments. As a result, it may be unwise for D to reduce strategic flexibility, as intense competition may require quick responses and strategic changes. Empirical implication, the greater the competitive intensity of the Indian market, the smaller the chance that D will favor entry modes that involve high resource commitment. D will therefore favor exports or licensing as opposed to a wholly owned subsidiary.

Country risk

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WACC

Since investment is an inherently forward-looking process, investment decisions must be taken on the expectations about future risks (and returns) (Albrecht et al. 1983). The risk captured in the environmental variables will, as argued elsewhere, affect the WACC only if the risks captured in the environmental variables are considered systematic.

• The location familiarity (knowledge) of India is relative low. This implicates that D will adjust the WACC rate upwards.

• Demand uncertainty for the Indian whey-market is low. The market is still in transition from the introduction to the growth phase in the product-life-cycle. The expected return forgone by bypassing of other potential investment activities for a given capital is thus expected to be high but the relative new market bears also much risk and uncertainty. This combination of high expected return and high risk implies that D will adjust the WACC rate upwards.

• The intensity of competition between industries participants is still disciplined but is expected to become (more) intense in the near future. This implies that D will adjust the WACC rate upwards.

• Country risk: The country risk for India is (still) relative high. A large body of research (Brealey et al., 2001 and James & Koller, 2000) states that higher levels of (country) risk will influence the cost of capital for a project.

D applies a certain WACC rate for European markets but the variables under review pointed out that D will adjust the WACC rate upwards for India due to increased levels of risk. Additionally, James & Koller, (2000) and Koller et al., (2005) state that the best way to do valuations in emerging markets is an approach where a company, like D, uses discounted cash flows together with probability-weighted scenarios. This approach will enable D to create scenarios which deal with assumptions about how the future may evolve.

3.2.1 Entry mode implications D

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The strategic variables implicate that D’s foreign operations need a high level of control.35 The transaction variables imply that in order to maximize their differential advantage in knowledge and to protect them against expropriation, D will favor high control entry modes (or exports).36 However, the location unfamiliarity, the relative high country risk level and the increasing intensity of competition implicate that D is likely to favor low resource commitment levels.

Based on the eclectic framework of Hill et al., (1990), the export entry mode therefore is the most favorable entry mode for D to enter the Indian whey market. Entry mode implications are made by taking into account that prior entry mode research suggests that different entry mode variables often propose different entry modes and that in order to resolve these return-risk trade-offs have to be made (Anderson & Gatignon, 1986, Hill et al. 1990 and Kim & Hwang, 1992). Below, the various entry modes and their implications are discussed in more detail.

Exports

Normally exports are used to enter a market in a short time span and only little investments are necessary (Kumar and Subramaniam, 1997). According to the presented framework is the export mode the most favorable entry mode. Resource commitment risk is low and the risk of expropriation of firm specific knowledge by others is negligible. However, as discussed in the strategic analysis, import tariffs vary between the 30 and 60% on the Indian whey market and weaken the competitive position of imported whey products. Therefore only minor export opportunities are present for D. It would therefore be better to produce locally so costs can be kept low.

Licensing

Licensing scored very badly on most of the strategic and transaction variables due to a lack of strategic fit and dissemination risk. However, licensing, together with exports, are the most favorable entry modes concerning the environmental variables. Taking all the entry mode variables into account, the advice is not to enter India by means of a licensing agreement.

35

The level of control is highest with a wholly owned subsidiary and lowest in the case of licensing.

36

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Greenfield investment

The Greenfield entry mode provides the opportunity to build high quality factories according to western standards, without being dependent on the willingness and abilities of a local partner. Both, strategic and transaction variables point towards setting up a wholly owned subsidiary (Greenfield investment or acquisition). However, as argued before, the variables country risk, location familiarity and intensified competition imply that it is not favorable for D to set up a wholly owned subsidiary in India. Thus, if starting up a wholly owned subsidiary, D should make sure to minimize these environmental risks.37

Strategic alliances may be able to solve some of these environmental risks by cooperating with a local partner. Alliances are also able to overcome most of the local know-how and support issues. D will therefore favor a strategic alliance as opposed to a Greenfield investment.

Strategic alliance

D could cooperate with a local partner, either by setting up a joint venture or by the acquisition of a local company. When cooperating with a local partner no import tariffs are applicable, so products could be marketed at a competitive price. D could benefit from the market knowledge and experience of the local partner, as well as its distribution and customer network and its reputation. However, in comparison to exports and licensing there are relative large investments needed. Besides, cultural differences can result in conflicts with the local partner. D would also be dependent on the partner, and failures of the partner can harm the operations and even damage the image of D.

Joint ventures differ from acquisitions in several ways. Primary, they are effectively partnerships and their creation does not usually involve a takeover premium to either party. Secondly, to be successful they must be structured to allow (effective) control (Copeland et al., 2000).38 The lack of trust and a perception of high risk prompt alliance partners to choose governance structures with tighter control mechanisms. (Kumar and Seth, 1998 and Das, 2001).

37

The lack of knowledge and experience with the local market is a crucial disadvantage for D in India. Building their own operations will take a lot of time, it may take even more time to establish a customer network and create a good reputation.

38

Constructing a successful strategic alliance in India