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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.
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.''
''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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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?''
