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CASE GAME
The Case of marketing Joint
Venture
Should Albert-Indica dissolve its JV in
favour of a strategic alliance? M. Kurtkoti of Nicholas Piramal, Sushil
Khanna of IIM-C, and Om Kaul of Om Kaul Associates discuss.
The
e-mail from the london office was terse. ''We need to review the basis of
our JV,'' it said. ''Could you schedule a visit here early next week?''
Raghu Shermon had seen it coming. In fact,
only two days ago, he had suggested to his top executives that they relook
the four-year old alliance. As the Managing Director of Albert-Indica
Ltd-a 40:45:15 tripartite joint venture among Indica Pharmaceuticals, an
Indian pharma major; Albert Plc., a transnational drug firm headquartered
in London; and Albert India Ltd, a personal care products firm-Shermon was
aware that although the drivers that led to the formation of the JV were
still valid, the matrix that was to sustain the business was becoming less
and less tenable.
It was over a decade ago that Indica,
traditionally a sugar, cement, and light engineering firm, had chosen to
grow the pharma business through the acquisition route. Having identified
health care and diagnostics as focus areas, it had struck JVs with
different MNCs operating in India. In 1996, it saw OTC market as a growth
engine and quickly tied up with Albert. The Indica group had since
established a formidable presence in various segments-like antibiotics,
antiseptics, analgesics, laundry-care, pest-control, floor-care, and
toiletries. It had also bought several dormant brands and grown them into
market leaders.
''The strengths each of the partners has
brought to Albert-Indica are unique,'' said Shermon, addressing his A-team
a little later. ''Albert Plc., its global brands; Albert India, its
distribution strength at the grocery level; and Indica, its muscle in
medical detailing and state-of-the-art manufacturing facilities.''
''We must evaluate the success of the JV in
relation to individual objectives of the three partners,'' said Mark
Samuel, Director (Operations), who was also the Albert Plc nominee on the
board. ''Indica was keen on expanding its OTC presence and gain brand
management skills. Albert Plc. wanted to use the local sales force as a
platform to launch its analgesic brands. And Albert-Indica needed support
on physician endorsement for its key OTC brands. The overall objective, of
course, was to increase marketshare and maximise the profitability of the
three JV partners.''
''We have achieved our individual
objectives alright,'' said Ramesh Krishnan, Vice-President (Services).
''We have also secured regular increases in turnover. Several of our
products have witnessed improvements in marketshares. But the overall
margins are declining. At an average of 4 per cent, our margins compare
poorly with those of our competitors, who manage 8-10 per cent. The
returns on investment are simply not forthcoming. Costs are going
haywire.''
Making
The Toss UP |
The JV Rationale |
The Alliance
Potential |
Ensures
a sharp focus to the business |
Free
partners from restrictive covenants |
Leverages
complementary skills of partners |
Allows
pursuit of independent business goals |
Provides
ownership and identity to sales team |
Ensures
tight control over costs |
''One way of bringing costs under control
is to pursue parallel streams of revenue,'' said Venkat Rao,
Vice-President (Manufacturing). ''But the JV structure preempts such an
approach with its restrictive clauses. For example, we can well use our
distribution outlets to market other FMCG products for a fee. We can even
market some of the competitor products that do not conflict with our own.
But the reality is that we cannot even market some of Indica's own
products through the distribution outlets of Indica-Albert. The problem
lies with the way the JV is structured.''
''I am not sure if you could blame the
structure,'' said Vinod Pradhan, Vice-President (HR). ''After all, almost
all the 270 employees are seconded by parent companies. Albert-Indica
bills them individually for all employee-related costs. The finished goods
are sold to the JV through the mechanism of transfer pricing, which offers
considerable flexibility in cost recovery. And the brands are owned by the
respective partners, not by the JV. All marketing costs are billed
product-wise to individual partners. The problem, in my view, lies with
ascertaining the costs of operations and slicing them according to various
products and services.''
''We should surely take a closer look at
the transfer pricing mechanism,'' said Murali Maran, Vice-President
(Finance). ''It is likely that the costs are getting inflated there.
Equally, we should review the structural costs associated with the JV.
There are other constraints too. An example: more than 70 per cent of our
marketing spend goes towards tracking the customer's usage-patterns,
attitudes, and behaviour. This is being done as per Albert's requirements.
Being a majority shareholder, it dictates terms.
"But, as I see it, the problem is
really one of mindset. Albert Plc. has a pharma mindset with its focus on
detail, precision, and logic. You need an FMCG mindset for an OTC
business, where the focus should be on moving the tonnage and building
retail muscle, even at the cost of returns on investment and margins.''
''If the existing structure is a hindrance
to securing profitability, it makes sense to dissolve it and go for a
strategic alliance,'' said Samuel. ''Four years of working together has
shown that it is possible to expand the scale of the relationship without
the costly device of an equity-based JV.''
''Together," said Shermon, "we
are uniquely placed to seize the big OTC opportunity in India and convert
it into a sustained, long-term competitive advantage for all of us. Let me
moot the idea in London," Shermon offered. ''As you know, Smithsonian
Inc. of the US has taken a 20 per cent stake in Albert. We might as well
find a new patch of acceptance in London now, because Smithsonian is known
for strong marketing focus and entrepreneurial drive. But, in the
meantime, let us work, at our end, on how to manage the transition towards
a competitive strategic alliance.''
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