Joint Venture, Nestle-General Mills

Sagar Gupta 12P041 Radhika Bhatter 12P096 Rakshit Sharma 12P160 Soumyajit Sengupta 12P171 Varun Gopal 12P174 Aneesha Chandra 12P186 Cristina Morini Exchange

Dairy Partners Worldwide (DPW)

Group 5 Strategic Alliances & Joint Ventures

Agenda Scheme of Presentation

Business Case Partner Selection Negotiations Alliance

Management Alliance

Assessment

Business Case

Nestle (Switzerland)Company Snapshot

Beverages 22%

Milk Products 20%

Prepared Dishes 16%

Pet Care 12%

Nutrition 11%

Confectionary 11%

Water 8%

Headquartered in Vevey, Switzerland, the company is the world leader in food manufacturing

The company has transformed itself into a nutrition, health and wellness company

Well diversified product portfolio with leading global market positions in coffee, infant nutrition, confectionary, ice cream, bottled water and pet food

Brand portfolio consists of 30+ Billionaire brands Nestle employs nearly 339,000 people in 468 factories in 86 countries

Largest packed food company in the world, with focus on nutrition, health and taste

Key brands include Maggi, KitKat, Milo, Nescafe, Purina, Herta, Dreyers and Gerber

#1 player in global infant nutrition Largest global player in coffee (mainly instant coffee) with 22% global

market share

Largest emerging market exposure absolutely There are several nutrition product lines in which Nestle has low or no

presence namely yoghurt, nutrition bars, dark chocolate etc.

CHF 61.9

2011A 2012A 2013E 2014E

Revenue 89,190 100,938 106,994 112,344

% Growth (4.9)% 13.2% 6.0% 5.0%

EBIT 13,278 15,232 16,250 17,247

% Margin 14.9% 15.1% 15.2% 15.4%

Net Income 10,438 12,092 12,802 13,564

% Margin 11.7% 12.0% 12.0% 12.1%

Brief Company Snapshot Competitive Positioning

Business Segment Breakdown Geographic Breakdown Financials

Americas 45%

Europe 28%

ROW 27%

Nestle444 Roadmap

Source: Company website, Company filings

Mission Statement

Objective

Good Food, Good Life To provide consumers with the best tasting, most nutritious choices in a wide range of food and beverage categories and

eating occasions from morning to night

Builds strong alignment within the company of what they want to achieve, strategically and financially, and how to go about it

To be the leader in Nutrition, Health and Wellness, trusted by all stakeholders

444 Roadmap

Competitive Advantages Growth Drivers Operational Pillars

Diverse Product and brand portfolio

Unmatched R&D capability

Unmatched geographic presence

People, culture, values and attitude

Leadership in Nutrition, Health and Wellness

Popularly Positioned Products (PPP)

Premiumization strategy

Out-of-home consumption

Leadership in innovation and renovation

Operational efficiency

Products are available whenever, wherever and however

Consumer engagement

NestleSWOT Analysis

Strengths Diverse product portfolio with several strong

brand names Widespread geographic presence in 86

countries with well-established distribution channel

Strong marketing and advertising skills Strong R&D capabilities and focus on

innovation Proficiency in M&A, strategic alliances and

joint ventures

Weaknesses Lack of consistency in product lines across

geographies Swift strategic decisions and aggressive steps

by competitors has led to lagging behind of Nestle in some areas and business segments

Weak financials (particularly profit margins) Increasing emphasis on mature markets

Opportunities Increasing focus of consumers on health and

nutrition Increased focus on developing nations Penetration of rural markets Tapping into the growing out-of-home eating

market

Threats Deterioration in consumer environment in

developed regions Strengthening of Swiss Franc Higher input cost inflation Increase in competition Increase in competition from private labels Key markets are maturing

Yoghurt IndustryKey Trends

The global dairy industry is undergoing a paradigm shift Advent of functional products Emphasis on low calorie, low sugar, digestive products Instead of the traditional milk, cheese, and butter concepts, more

functional products such as yogurt, probiotics, etc. are now being accepted as the medium of delivery for beneficial functional ingredients

The conventional spoonful of plain yogurt is increasingly substituted by drinkable yogurt, organic yogurt, bio yogurt, or fruited / flavoured yogurts.

Surge in consumer demand in most countries for drinkable yogurt, organic yogurt, bio yogurt, or fruited / flavoured yogurts due to:

The rising awareness about lifestyle related health concerns such as diabetes and obesity

Rising awareness about the benefits of yogurt, with its positioning as a health-promoting product that improves metabolism, has a positive impact on digestive mechanism, and enhances the immune system

Increasing consumers willingness to try the new and innovative product offerings available, as a result of their wider international exposure

Emergence of dual income households with higher disposable incomes

CHF 61.9

Changes in the Dairy Industry Key Growth Drivers

As per the GIA, the European and Asia-Pacific markets, which account for a more than 80% share of volume consumption, dominate the global yogurt market

Within the Asia-Pacific region, China is the fastest growing regional market for yogurt in terms of consumption (value and volume)

As per Euromonitor estimates, emerging markets, including China and India, will contribute 95% of the global dairy markets growth between 2011 and 2016

When compared to high consumption markets as France (which sees an annual consumption of25 kg), Germany (24 kg), and Holland (23 kg), the per capita consumption in India is a meagre 2.3 kg per year

Package Facts estimated the U.S. market for yogurt sold at retail to be $7.3 billion in 2012, up 6.6% from 2011. They also estimated that by 2017, sales will hit almost $9.3 billion. This growth is attributed to one sub category: Greek yogurt whose sales increased more than 50% in the last year in food, drug and mass channels

Refrigerated yogurt is the eighth largest selling subcategory in food, drug and mass market (excluding Walmart)

Yogurt sale is growing in food services menus The top three marketers of yogurt account for almost three quarters of

all yogurt sales in food, drug and mass market channels

CHF 61.9

Yoghurt In Europe and Emerging Economies Yoghurt In USA

Partner Selection

Partner SelectionSelection criteria

Complementary Capabilities

Optimum Mutual Dependency

Similar Company Size

Financially Stable

Strategic Complementarity

Compatible Operating Philosophy

Low Culture Barriers

Compatible Management

Ethical and Trustworthy

Technical Resources & Skills should be complementary in nature

There has to be some identifiable mutual need and middle level of dependency, not too much or too less

Elephant & the Ant complex has to be avoided at all costs

The partner should be financially capable of investing in the JV

Goals and objectives of the partners have to have strategic fit

Inconsistencies related to normal operations should be as low as possible, like the accounting system or employee benefits

Cultural, Communication barriers should be as lo as possible to reduce effort and time allocated to solving cultural issues

Close personal rapport if available, should be treated with premium as it helps JVs succeed exponentially

Partners should look at all business issues with the same and highest levels of integrity and honesty


Mutual Dependency


Financially Stable






Located in Minneapolis, USA the company holds #1 or #2 positions in growing food categories in USA and around the world

Main product categories in the US Retail markets are ready-to-eat products, frozen products, mixes, grain, cereals, snacks and

organic products

Main product categories in the international arena include superpremium ice cream and frozen desserts, refrigerated yogurt, snacks, frozen products, and dry dinners

Brief Company Snapshot

Financial Snapshot

Key Brands

Company Sales

Share Price Performance

Company Overview With 30 manufacturing facilities spread across the world, the company

distributes its products in over 100+ countries

Founded in 1866, the companys goal is to generate balanced long-term growth

The key growth drivers for the company are innovation, brand-building, leading customer growth, margin and international expansion

General Mills (United States)Company Snapshot

US 75%

Non-US 25%

US Retail 63%

International 25%

Bakeries and Foodservice

12%

34

38

42

46

50

54

Jun/2011 Oct/2011 Feb/2012 Jun/2012 Oct/2012 Feb/2013 Jun/2013

USD 2011A 2012A 2013E 2014E

Revenue 14,880 16,658 17,774 18,218

EBIT 2,774 2,562 2,852 3,040

Net Income 1,804 1,589 1,892 1,938

Market Capitalization USD 32,282

Enterprise Value USD 39,966

Share Price USD 48.53

EV/Revenue 2013E 2.2x

EV/EBITDA 2013E 11.2x

P/E 2013E 17.3x


Mutual Dependency


Financially Stable






General Mills (United States)Company Snapshot

General Mills has the yogurt production capabilities while Nestle has the global marketing & distribution capabilities.

Both General Mills and Nestle are big market players and will be dependent on each other for Yoplaits international expansion

Both General Mills and Nestle are market leaders in their fields of business, one nationally and the other, globally

General Mills and Nestle have been at the forefront of announcing high profits over the years and have given increasing dividends every year

General Mills hopes to increase revenues to touch the $20 billion mark while Nestle wants to increase its product portfolio in emerging nations

Having previously collaborated in a continuing JV globally, GM and Nestle should have lower cultural barriers than most America-European JV partners

CPW has allowed both the managements to get in touch with the different styles of management of the partner and this will help in increasing the success potential of this new JV due to the personal rapport that the top management of GM and Nestle share between themselves

Nestle and General Mills have been highly vocal in their use of organic food and have been donating generously to fund product innovations. Both the firms maintain the highest forms of honesty and integrity in their operations, exhibited by the low number of product recalls or controversies.

Groupe Danone (France)Company Profile


Mutual Dependency


Financially Stable






French food-based Multinational Corporation Products include fresh dairy products, bottled water, cereals

and baby foods and yogurts

World No.1 in fresh dairy products World No.2 in bottled waters, by volume World No.2 in baby nutrition European No.1 in medical nutrition


Financial Snapshot

Key Brands

Company Sales

Share Price Performance

Company Overview

Company strategy is based on two pillars: Strong Brands & Clearly defined Geographies

Over 7 billion customers Over 50 production facilities globally Market Capitalization: 34.5 Billion

56% 20%

17%

6%

Dairy Baby Nutrition Water Medical Nutrition

10%

22%

8% 60%

France BRIC USA Others

20/11/08 20/12/08 20/01/09 20/02/09 20/03/09 20/04/09 20/05/09 20/06/09 20/07/09 20/08/09 20/09/09 20/10/09 20/11/09

Market Capitalization Euro 34,618

Enterprise Value Euro 41,048

Share Price Euro 54.86

EV/Revenue 2013E 1.9x

EV/EBITDA 2013E 12.2x

P/E 2013E 21.6x

Euros 2011A 2012A 2013E 2014E

Revenue 19,310 20,870 21,590 22,570

EBIT 2,843 2,958 2,730 3,044

Net Income 1,671 1,672 1,505 1,795

Groupe Danone (France)Company Profile


Mutual Dependency


Financially Stable






Danone has the yogurt production capabilities while Nestle has the global marketing & distribution capabilities.

Both Danone and Nestle are market leaders in their fields of business, one in the dairy business globally , the other in the F&B industry globally

Danone and Nestle have been announcing high profits every year with Nestle sales around $90b and Danone at $20b

Both the companies are headquartered in Europe leading to the possibility of low cultural barriers

Danone and Nestle both are highly regarded for their ethical standards of operations and have been voted as two of the most trusted companies globally


Mutual Dependency


Financially Stable






Started in 2005, after founder CEO- Hamdi purchased an abandoned yogurt production plant from Kraft

Started with 5 employees in 2005 with current strength well above 2000 with the 1st Chobani yogurt hit store shelves in 2007

Products include only yogurt, but in different flavors and sizes Currently present in USA, Canada and Australia Earlier called Agro Farma, name changed in 2012


Chobani had to recall its Greek yogurt product line from all across the USA due to product concerns after numerous customers were taken ill, post consumption

Purists have slammed Chobani for using technology to bypass the authenticity of milk required to produce Greek yogurt

Recent Controversies

Key Products

Chobani has partnered with Cornell University to support Dairy Innovation with a $1.5milion gift

Andreas Sokollek was appointed SVP, SC & D to bring about greater coherence throughout the supply chain &

retail distribution chain Recent revenue estimates peg the value at $634m Recently launched 14 new product flavors across all

yogurt product categories

Recent Events

Key Executives

Company Overview

Company thrives to grow over the next few years with primary focus being on new flavor launches every quarter

Fastest growing yogurt manufacturer in USA and Canada Headquartered in New York, Production facility in Idaho Privately listed company

Chobani Inc. (United States)Company Snapshot

Name Designation Hamdi Ulukaya Founder & CEO David Denholm President & COO

Andreas Sokollek Senior VP, Supply Chain & Distribution Peter McGuiness CMO & Chief Branding Officer

James McConeghy CFO


Mutual Dependency


Financially Stable






Chobani Inc. (United States)Company Snapshot

Chobani has the yogurt production capabilities in Greek yogurt while Nestle has the global marketing & distribution capabilities.

Choabani is a small player in the overall sector, but one of the biggest yogurt producers in the world while Nestle is the global FMCG powerhouse

Chobani is on track to becoming a $1b company by 2015 while Nestles profits have ranged around $13b in recent year

Chobani employees get benefits that have been modelled on Nestles employee benefits program leading to greater coherence among their employee efforts and morale

Chobani has been involved in a number of controversies, most recent being the one in which 89 people were taken ill after consuming Chobani yogurt while Nestle is one of the most respected and relatively blemish-free track record in regards to ethical operations


Mutual Dependency


Financially Stable






FAGE is an international dairy company with a focus on yoghurt Leading market position in the Greek yoghurt market Primarily distributes its products in USA Sales in over 35 countries Manufactures, distributes and sells dairy products including

yoghurt, dairy dessert, milk, cream and cheese


Key Products

FAGE USA recently entered into a long-term agreement with Proliant Dairy that will provide a sustainable outlet for the whey from FAGEs production facility into New York

General Mills and FAGE resolved their trademark conflict on the use of the word Total. Now both can use this word in the names of their respective products

FAGE recently won a court case against Chobani according to which Chobani would not be able to

market its products as Greek yoghurt in UK. Chobani has decided to withdraw from UK currently.

Recent Events

Awards and Recognitions

FAGE Total 0% received BiteoftheBest.com Seal of Approval

FAGE Total was named as the best plain yoghurt by Mens and Womens Health Magazines

Sante, the magazine for restaurant professionals, honored FAGE with their Gold Star Award

Fage S.A. (Greece)Company Snapshot


Mutual Dependency


Financially Stable






Fage S.A. (Greece)Company Snapshot

FAGE has the yogurt production capabilities in Greek and other low-fat yogurt while Nestle has the global marketing & distribution capabilities.

FAGE is a small player in the overall sector, but one of the few European companies with a pan-USA presence and in 35 other countries

FAGE is is looking at $3b revenues company by 2015 with international expansion being done through internal accruals creating high unutilized debt capacity for the company

FAGE has been trying to enter the emerging markets to drive its revenues but has almost no distribution set up in the high growth regions with most of its revenues coming from developed markets while Nestle wants product access to yogurt

FAGE has not been involved in any major controversy related to its production or operations giving it an image of a well run and honest company, which fits Nestles own story of integrity and success

Competitor Radar Screen for NestleIdentifying the Competitors

Mondelez International

General Mills

Nestle

Heinz

Kraft Foods

Hershey

Kellogg's

Coca Cola

Starbucks

PepsiCo

Mars, Incorporated

Group Danone

Unilever

Associated British Foods

Conagra

Current Competitors

Distant Competitors

Near-Term Competitors

Among the possible partners we have suggested:

Group Danone is a current competitor General Mills is a near-term

competitor

FAGE and Chobani are not on the competitor radar screen currently

Selecting Joint Venture PartnerPartner FIT

Company General Mills Dannone Chobani Fage

Origin Country

Primary Sales Regions


Optimal Mutual Dependency N/A N/A N/A

Similar Company Size N/A

Financial Stability

Strategic Complementarity N/A N/A

Compatible Operating Policy N/A N/A N/A

Low Culture Barriers N/A N/A

Management Compatibility N/A N/A N/A

Ethics & Trust

Yoplait YogurtGeneral Mills

1 2 3 4 5

General Mills 0.9 1.3 1.4 1.55 1.65

Nestle 0.6 1.1 1.35 1.5 1.6

Bright Foods 0.7 1.2

Lactalis 0.6 1

General Mills won the bidding war for Yoplait after a grim battle with Nestle, valuing the company at $2.3billion

Nestle wanted to acquire Yoplait too due to the market leading brand it had and to augment its product portfolio

However, after acquisition, the market share of Yoplait has decreased in the Americas from 32% to 26% and is currently no.2 in the yogurt space after Danone and No.3 in the Greek Yogurt space after Chobani and Danone. The expansion of Yoplait in the emerging markets has also taken a hit due to decreasing sales figures in the US market. Thus, expansion has taken a backseat and consolidation of the US market is more important to General Mills as of now. Hence, Nestle with its global distribution network seems like the best candidate to help GM in expanding the brand in emerging markets without much recourse on its finances and resources.

Formation of Joint VentureKey Motives for Nestle

Internal Benefits

Competitive Benefits Strategic Benefits

Nestle will be able reduce its risks and share costs in the production and distribution of a

new product line Greek yoghurts

Most of Nestles current and near-term competitors are getting into the production of Greek yoghurt. This joint

venture allows Nestle to level the playing fieldx

Nestle has been working towards transforming itself into a leader in

Nutrition, Health and Business. Addition of the yoghurt product line is another step

in this directionx

Formation of Joint VentureKey Motives for General Mills

Internal Benefits

Competitive Benefits Strategic Benefits

General Mills would be able to share risks of marketing a new product and reduce its costs

of setting up a global distribution channel

General Mills derives 75% of its revenue from USA. Given the mature market in USA, General Mills and its competitors have

been trying to increase their presence in emerging economies

This will be an important step in increasing the brand value of General

Mills across the globe and will be a step towards the transformation into a truly

global company

Nestle + General MillsTheoretical Justifications for the Joint Venture

Theory Understanding This Joint Venture

Resource Based View

Nestle: Nestle is known for having a strong global distribution network Also, it is ranked number 4 in the Effie Effectiveness Index which measures

the advertising and marketing effectiveness of companies

It wants to build up on its nutrition portfolio General Mills

It has a strong history of innovation It has got strong yoghurt brand (Yoplait was named as the Yoghurt Brand

of the Year 2013 in USA)

It wants to increase its presence outside USA The companies have complementary resources and capabilities and both

can gain by co-operating



Transaction Cost Rationale

Nestle: Make: Making is not a viable option, as most competitors have already

entered this market and any further delay should be avoided. Production costs are not low (R&D, advertisement, manufacturing, marketing)

Acquisition: The growing yoghurt market is a new opportunity and an acquisition at this stage may be too risky an alternative. Further, most yoghurt companies have a high valuation currently

A joint venture is appropriate General Mills

Make: The company can either set up its own global distribution network, but that would involve large costs, time and effort

Acquisition: Most companies having a well-established distribution network are too large for General Mills to acquire

A joint venture makes the most sense In case of these two companies, the transaction cost involved in setting up a

JV would be low due to their prior relationship and track record



Organization Knowledge and Learning Theory

Nestle: Most recent additions to Nestles portfolio have been through

acquisitions rather than organic growth

This JV in which Nestle would get to work with General Mills to innovate new dairy products will be an important learning ground for Nestle

General Mills General Mills marketing skills need to be improved upon Further, it is still majorly a US centric company. It needs to learn how to

mould and innovate products which suit the tastes of the developing and emerging nations

This JV will allow General Mills to learn key elements of these while working with Nestle

Thus, both companies would be able to add to their learning and experience with this joint venture.

Nestle + General MillsAlliance v/s Acquisition

Synergies

Modular Sequential Reciprocal

In case of Yoplait, General Mills would be involved in the production of the products. The completed

products would be passed on to Nestle, who would be responsible for marketing and distributing the

product

The joint venture would also bring together the technical and managerial acumen of the both the

companies so as to create new products and innovations in the field of dairy. This would involve an interactive knowledge-sharing process and both the

firms personnel closely working with each other


Assets

Hard Soft

The companies would be sharing hard assets like production facilities, distribution network

The companies would be contributing manpower (both technical and managerial)


Degree of Uncertainty

Low Medium High

The degree of uncertainty is medium. The two firms have a joint venture already. Thus, there has already

been a fair degree of due diligence. However, as their earlier venture focussed on cereals, there is still some uncertainty about the other businesses of the

each firm.


Forces of Competition

Low Medium High

The forces of competition are high. Most of Nestles competitors have already entered the yoghurt

market (through organic growth/alliances/ acquisitions). In case of General Mills, most

competitors are expanding into the emerging economies. Thus, there are high competitive

pressures


Criteria Type Alliance v/s Acquisition

Synergies Sequential (initially)and Reciprocal (over time) Equity Alliance (currently)

Assets Hard and Soft Equity Alliance/Acquisition

Degree of Uncertainty Medium Equity Alliance

Forces of Competition High Acquisition

An equity alliance is more appropriate than an acquisition. An acquisition is further ruled out because of the existing joint venture agreement between Nestle and General Mills whereby either company cannot put in a hostile

takeover bid for the other company before three years from the termination of the joint venture agreement.

Nestle + General MillsSnapshot of Rationale

Entry into a growing category An important addition to its

nutrition portfolio Greater innovation and new

product development through close interactions with General Mills

Leveraging strong brand names of General Mills product

Sharing of costs and risks

Entry into the emerging economies Leveraging the strong brand

name and the strong distribution channel of Nestle

Learning how to create products which satisfy the needs of the customers in emerging economies

Learning advertisement and marketing skills

Dairy Partners Worldwide A Nestle and General Mills Venture

Joint Venture: Theoretical Tenets

Does the Joint Venture Make Sense?Political Factors and Resource Requirement

Polit

ical

Fac

tors

Resource Requirement High Low

Hig

h Lo

w In case of a strategic alliance

between Nestle and General Mills, the political factors are

low as there are no regulatory requirements which make an alliance mandatory/the only

available option

The resource requirements are high, as General Mills has a product line which has high growth potential and Nestle has a strong distribution system leading to greater market access

Given low political factors and high

resource requirement, a Strategic Alliance/Joint Venture makes sense

this case

Strategic Alliance/Joint Venture OrientationKey Resources and Risks

Control Flexibility

Security Productivity

Primary Risk Relational Risk Performance Risk

Kno

wle

dge

Prop

erty

Pr

imar

y R

esou

rce

Key Resource: Property The alliance would involve sharing of production

facilities, distribution network and product lines

Key Risk: Performance Risk As the company already has a successful joint

venture, the relational risk is low

Performance risk is high as they would be introducing a product across several geographies. Thus, the macroeconomic factors may worsen, the product may not work, the competition may be high etc.

In this case, the strategic alliance orientation needs to be focussed on flexibility

This can be done by having an incremental approach to the alliance and having clear performance metrics

Nature of Alliance/Joint VentureProactive v/s Defensive

Criteria Proactive Alliance Defensive Alliance Reason

Business Future Expand Business

Survival in Existing Business

Nestle is entering into new product lines. General Mills is expanding

its geographic presence

Competition Competitive Advantage Competitive Pressures

Nestles competitors have already entered into this product line. General Mills competitors are

expanding into emerging markets

Market Phase Growing Market Declining Market

The dairy product market is growing in most geographies

Other Firms Resources Leverage

Critical Dependency

To effectively ward off competition, the companies need each others

resources

Strategic Option Create Options No Option

Most other potential partners are already collaborating with

competitors

Proactive Alliance

Defensive Alliance

Nestle +

General Mills

Key DriversFrom The Perspective of Co-opetition

Setting Standards

The yoghurt market is highly fragmented. The coming together of two giants like Nestle and General Mills will set clear standards for the industry

Sharing Risks

With any new product, there is a performance risk attached At the same time, it also involves costs like setting up production facilities and distribution systems, marketing and advertisement

expenditure. This alliance will allow the two companies to share these risks and costs

Entering Emerging Markets

Both companies would be able to increase their presence in the emerging economies

Expanding Product Lines

Nestle will be able to enter into the Greek yoghurt market and hence add to its nutrition portfolio Reducing Costs

By setting up combined production facilities, both the companies would be able to achieve economies of scale Gaining Market Share

With the help of General Mills product line and Nestles strong distribution system, the companies will be able to increase their market share across geographies

Creating New Businesses

The two companies already have a successful joint venture This joint venture would allow them to further strengthen their relationship while addressing a gap in their product portfolios

and geographic strength

Key RisksFrom The Perspective of Co-opetition

Technology Leakage

General Mills and Nestle had a face-off in the acquisition of Yoplait in which General Mills emerged victorious However, General Mills has till now been unable to effectively market and distribute its yoghurts products While this alliance will allow it to leverage the marketing expertise of Nestle, but at the same time there is a risk that Nestle

might be able to glean into the technology/processes involved in the production of yoghurt

Telegraphing Strategic Intention

The two companies may come to know which geographies and products the other company is planning to target based on the nuances of management decisions

Customer Defection

Based on how the products of the joint venture are promoted and marketed (use of brand names/company names), customers of one company may come in contact with the other company, hence increasing the risk of defection

Slow Decision Making

This is a major drawback of strategic alliances and joint ventures. As the alliances/ joint ventures decision affects both the companies, and as the companies may have differing goals and objectives, there is slow decision making so as to satisfy both the parties

Typology of Alliance/Joint VentureOrganizational Interaction and Conflict Potential

Pro-competitive

Alliance

Non-competitive

Alliance

Pre-Competitive

Alliance Competitive

Alliance

Extent of Organizational Interaction

Low High

Hig

h Lo

w

Con

flict

Pot

entia

l

Alliance Type Strategic Objective

Flexibility Core Protection Learning Value

Adding

Pre-Competitive

Competitive

Non-Competitive

Pro-Competitive

In this alliance, given the lower extent of geographic and product overlap, the conflict potential is low-medium. Further, the success of their earlier joint venture also points towards a low conflict potential

The extent of organizational interaction will be high as of shared control on most decisions

Thus in this alliance, the key strategic objective would be learning followed by value adding, flexibility and core protection

Negotiations: Role Play

Dairy Partners WorldwideFinancial Ownership and Management Control

Financial Control 50:50

Joint Venture Structure

The parties are equally strong and have a history of a successful 50:50 IJV called CPW

Management Control

Nestles Perspective and General Mills Perspective Our Recommendation

Both companies would want

greater managerial control. They

would want to choose the CEO

to ensure that their companies

interests are met

CEO should be externally appointed so that the JVs objectives are not subordinated to

the individual objectives of the two companies.

Split Control: Nestle responsible for marketing communication, distribution, operation and

logistics. General Mills responsible for branding, content and manufacturing.

Shared Control: R&D, HR and talent management and finance

Dairy Partners WorldwideScope of Joint Venture

Nestles Perspective General Mills Perspective Our Recommendation

Nestle would want the joint venture to

be involved in production and

distribution of dairy products across all

geographies (including USA)

General Mills would not want to give up

its control on the US market as it derives

75% of its revenue from this geography

USA should not be a part of the joint

venture because that would encourage

direct competition between General

Mills and Nestle and hence could lead

to mis-alignment of incentives.

If either firm comes up with a

competing/substitute product on its

own, the JV should get first right of

distribution/promotion/bringing it to

market globally

Dairy Partners WorldwideGovernance & Regulatory Issues

Nestles Perspective and General Mills Perspective Our Recommendation

Both would want greater representation on the board.

Further, they would prefer to have their own CEO and

Chairperson heading the joint venture

CEO should be externally appointed

Chairperson should be rotated every 3 years

Both would want the JV to be situated in their home country

of operation to lend greater influence on the JV implicitly

The JV should be located in Switzerland as the country boasts

of the one of the most favourable tax regulations and legal

stipulations, along with being a favourable business ground,

as regulatory approvals are required only in financial services

companies, real estate business, healthcare and trading in

specific goods

Dairy Partners WorldwideExit Options

Our Recommendation

Initial lock-in period of 5 years with no change in equity structure

If the firm suffers increasing net losses for three consecutive years, the JV should be re-evaluated

If there is change in ownership in any of the partner firms, the JV will be dissolved with first right of refusal to the other partner

If one partner is looking to sell, the other partner has first right of refusal

In case of any breach of covenants of the JV by any partner, the aggrieved party can buy out the stake of this partner in the JV or

liquidate the JV

Management of the Joint Venture

Nestle + General Mills = International Joint VentureDeterminants of Performance

Key Determinants

Control of the IJV by Parent Firms

Autonomy Granted to IJV

Management

Trust Between the IJV Partners

National Cultural Differences

Corporate Cultural Differences

Addressed during negotiation of structure, control and governance

Should have been strongly established during the previous joint venture

Corporate and National Differences exist, but as the company has been able to work successfully in the past, future co-operation

is expected to be fruitful

Role of the Joint Venture Manager5 Key tenets to effective Joint Venture Management

Joint Venture Management

Inter-Organizational

Trust

Contribution Monitoring

Efficient Information

Flow

Periodic Strategic

Assessment

Focus on Internal

Harmony

Alliance ManagementInter-organizational trust


Inter-Organizational

Trust

Nestle and General Mills have been trusted partners in one segment of the market

This JV should be looked at as an extension of that relationship and more

Regular meetings between the top management and R&D wings of both Nestle and General Mills should be convened

Bring on board people who have worked in CPW previously so as to lend credibility to DPW, as a long lasting bond

Alliance ManagementPartner Contribution Monitoring


Contribution Monitoring

Nestle and General Mills have been global partners for over 20 years

The JV manager should have the authority to initiate corrective action in case either partner is found lacking in its resource contribution (GM-Product // Nestle-Market)

The best product developers should be made available to DPW by GM while the best marketers should be made available to DPW by Nestle, in principle

JV has to be monitored continuously, some aspects periodically while others daily

Alliance ManagementEfficient Information Flow Management


Efficient Information

Flow

CPW has been one of the most successful and long lasting JVs in the FMCG industry primarily due to the efficient processing of information

Managing information flow has to be a priority task rather than an incidental management mechanism

Care has to be taken not to pass on proprietary knowledge from one firm to another while maintaining the JVs interests

A decentralized approach needs to be taken as product-market JVs tend to suffer from problems that require quick decision making

Alliance ManagementPeriodic Strategic Assessment

General Mills and Nestles previous JV: CPW was a defensive alliance to counter the threat of Kelloggs in Europe

DPW is envisaged with a view to counter competitive pressures in the yogurt market globally, but with greater focus on latent geographies where Nestles distribution strength is greatest

There should be a lock-in period of at least 5 years to allow for the resources ploughed into the JV to have room for productive growth and output

GM currently wants to increase its geographic diversity while Nestle is aiming for product diversity which might change in the long run, in the case of which there should be a clear exit policy singled out and accepted by both parties


Periodic Strategic

Assessment

Alliance ManagementFocus on Internal Harmony

Internal relationships between functional managers and divisional managers must be kept intact and away from any JV related pressures and conflict

JV managers selected to run the new firm should be credible with exemplary prior track record at the parent firm

Importance of the JV to the respective firm has to be clearly outlined to the middle level management for greater coherence in the parents activities

People involved in the processes that are replaced by the JV should be streamlined into the JV to promote internal harmony and consistency of strategic intentions of the firm


Focus on Internal

Harmony

Assessment of the Joint Venture

Assessment of AllianceKey Factors

Shared Risk

Shared Resources

Shared Rewards Shared Vision

Shared Values

Both partners bear a fair and appropriate share of risks in the alliance, no partner has unnecessary burden

Each partner commits an appropriate amount of resources be

it capital, people, knowledge etc.

Both partners share appropriately in the rewards, the partners work together to create

mutual wins whether to attain success via similar market, similar customer base etc.

The partners share a common vision, common views of the objectives, results and outcomes

of the alliance

Both partners share common value systems and complement each others corporate culture. Such

shared value systems is the foundation of this relationship

providing the means, motivation and commitment to resolve

partnership related problems and mutually grow the relationship

Performance MetricsAssessment of the Key Factors

A precise set of meaningful parameters is the best way to drive performance and produce desired benefits from the partnership. These metrics should include shared measurements that are similar to both partners.

Metrics

Operational

Timeliness Productivity Quality Measurements

Innovation

Process improvement

Technology Integration

Partnership

New business gained

Profitability gained across

portfolio

Developing an Evaluation PlanAssessment of Joint Venture

Rationale for the Relationship A strategic intent by partner companies establishes the need/business case for a relationship. The nature of the objectives will drive the type of partners sought, the manner in which the relationship operates, and thus the type of evaluation

metrics selected

Strategic Objectives of Relationship They provide a critical part of the foundation on which the management control system for the relationship is built The evaluation criteria for assessing the performance should be developed according to the relative importance of the various strategic objectives

established by managers However, it follows that as strategic objectives are modified during the lifetime of the alliance, to remain effective the evaluation criteria must be

adapted as well.

Selection of Evaluation Criteria The balanced scorecard framework can be used for this purpose. It shows how the strategy of a firm can be translated into performance measures

based upon four perspectives: financial, customer, internal business process, and learning and growth These four perspectives provide the balance necessary for a company to focus on issues that are indicative of longer-term success, rather than

concentrating on short-term financial measures Customization is necessary in using the balanced scorecard in an alliance relationship.

Emphasizing Specific Metrics Another benefit of the balanced scorecard approach is the potential to tailor the system to meet the needs of a given relationship

Implementing the Evaluation Plan Formalized and regular assessment is essential for those involved in the alliance to attach credibility to the process and to learn from the results The evaluation process will also need to be refined throughout the life cycle of the alliance to assure that timely information is being collected The final link in the evaluation process is to consider how the output of the evaluation will be used to determine individual and team performance

and rewards Assessment frequency should consider the evaluation metrics, as well as the environment in general

Thank You