ALPES S.A.: JOINT VENTURE PROPOSAL CASE ANALYSIS
SUBMIT TO: DR GERRY KERR
SUBMITTED BY:
Charles River Laboratories (CRL)
Key Issues
Primary: Should CRL invest $2 million to establish a state of the art SPF egg Mexican JV? In order to prove the Mexican JV is feasible, Dennis needs to convince Jim Foster (CEO) as well as the rest Board of Directors that the profit margin from the new JV well exceed the parent company’s strategy growth margin, thus the JV is a good opportunity for CRL to fill its strategic growth gap. However, the board also needs to take the investment environment into their consideration. Such as the number of companies involved and their internal initial capital investment, different geographic locations etc.
Secondary: Can CRL synergy with ALPES? The IDISA Group is a family business and is made up of 5 independent companies. Given the family-owned style of corporate governance of ALPES (no business strategic plan, no regular board meeting and lack of financial transparency), how can CRL transfer their own value, goals and coronation structure to the JV and will those work out?
Tertiary: Mexico’s instability. Before deciding a significant investment, CRL must do their environment scanning. Mexico is labeled as a country with high corruption and low economic stability. In addition, the JV located in a underdeveloped countryside where currently facing a contamination problem. From the voice of operating experience, CRL has never success in doing business in Mexico in fifty year of their operation.
PESTEL Analysis
Political: The NAFTA contract plays an important role in CRL’s business. The changes created demand for SPF eggs and related vaccines. And to meet the supply and demand ratio they had to increase the production. The whole process happened because rules and regulations went through some changes in Europe and Asia. Charles River Laboratories had offering from ALPES to share Joint Venture which would give them to use their resources and capabilities in a better way.
Economic: The Mexican currency is not very stable in the present situation thus it makes the feasibility and condition of market very much vague. The offer of joint venture made by ALPES is not applicable in this situation of uncertainty. Add more to that, it is a matter of opportunity for ALPES to receive investment from CRL and make them equity holder. And it certainly because of Mexico’s high borrowing cost. On the other size of the coin, the major buyers (InterVet and Anchor) build their new plants near Mexico city which triggered the increasing demand of SPF eggs has exceeded supply by between 5 and 10 percent.
Social: The population in Mexico was not very socially improved. Poverty rate was high in villages. According to the US Department of Agriculture, bacteria in regular eggs cause considerable illness and death every year, thus seeking to buy safer eggs will have a positive influence on the demand of SPF eggs.
Technology: In this industry of SPF eggs and Vaccines, research and development is very important to meet all the demand for new innovation. There’s a high chance of infection and contagion in producing SPF eggs. So to make sure quality product is being produced continuous research is necessary in this field.
Environmental: As mentioned above the infection and contamination in those poultry farms caused 4 million illness and 300 deaths of local farmers. To ensure the environmental safety and farmers life safety they should create more awareness and apply more upgraded technology. Also the process of producing SPF eggs is technical enough to pollute the environment.
Legal: European and Asian regulations changes can help to achieve standard and improvised production. The demand is constant thus changes in regulations will create more market for SPF eggs and vaccines. In the meantime, the JV needs to increase it SPF eggs’ quality in order to meet the United States and European countries quality standards and import regulations.
Porter’s 5 Forces
Competition from Rivalry: (Low) In the SPF eggs industry, there is a demand gap of 5 to 10%, thus the competition between the rivalries are low. Also, CRL doesn’t have much competition from neither local nor international firms. To mention competition, Lohmann-Tierzucht, is the one whose parent company is PHW doing business in US industry. The competition is not there but it is growing and might catch up CRL in near future.
Threat of New Entrants: (Low) Although the initial capital investment for joining the industry is not intensive, the biological technology involved in producing SPF eggs is high. The IP is controlled by few companies including AlPES and it is unlikely to be imitated by the new entrants. Moreover, The SPF eggs are produced by sophisticate production process and the output need to meet strict quality requirement.
Threat of Substitutes: (Low) The SPF eggs are the only product which can meet the require for use in discovery research and development and testing of new pharmaceuticals. Thus there is low substitute risk. However, the standard farm eggs can be use as a substitution in human vaccine and they are considerably cheaper than the SPF eggs. Other than that, there is no sign of superior substitute of the SPF eggs.
Bargaining power of Buyer: (Medium to High) There is a demand gap of SPF eggs between 5 to 10 percent in the market, which somehow gives ALPES advantages on pricing their product. However, the two major buyer from ALPES are Mexico’s two largest animal vaccine producers, InterVet and Anchor. The former buys 80 percent of the JV’s output, and the latter buys the remaining 20 percent. The high purchase volume gives buyers very high bargaining power. This leaves very little bargaining power to ALPES unless they can reach other bulk purchase buyers.
Bargaining power of Supplier: (Low) The case did not mention who are the main suppliers to ALPES, but as the JV’s sales goes up, the company’s purchase volume will increase considerably which will gradually lower the supplier’s bargaining power. Moreover, ALPES are more likely to purchase poultry feed from their suppliers and this to JV has very low switching cost, thus this will further lower the supplier’s bargaining power.
Internal analysis (VRINE Model)
1.Capability of technology and knowledge
Valuable – The capability of technology and knowledge for CRL and ALPES is very valuable which will enhance the technology communication and strengthen the competitive advantages for the new joint venture. High level professional technicians in the field as well as advanced technology will keep stabilizing the new joint venture’s performance and market shares.
Rare – The technology and knowledge are very rare in the vaccine industry because most competitors in this area still provide normal eggs instead of SPF eggs.
Inimitable – Yes, this kind of capability is inimitable in a period of time because it is pretty tough as well as time-consuming to break the technology of producing SPF eggs and copy it for competitors. But in a long run, it is possible to conquer the puzzle to use it widely.
Non-Substitutable – The status of the capability may not be challenged shortly because it is still advanced and unique, but in a long term, some kind of new technology may come up to change the situation.
Exploitable – It is exploitable to use the technology and skills into production of SPF eggs and providing them for further function.
2.Network of customer relationship
Valuable – The networks of customer relationship for CRL and ALPES are very valuable, because harmonious relationships between the two companies and important customers have been maintaining and improving competitive advantages for both CRL and ALPES for more than years in some extent. Thus, the foundation of the new joint venture will also have a strong customer backup.
Rare – Yes, the network of customer relationship for this industry is rare because the demand of SPF eggs is limited and is specific for certain kinds of organizations in the industry. So it is not that common to get a long term stable customer relationship by competitors.
Inimitable – It may be imitable in a short run for competitors to get customer relationship like this, but it is really hard and costly to compete with companies who have already have mature customer relationships.
Non-Substitutable – The network of customer relationship will be non-substitutable for the new joint venture. The precious resources of capability can not be replaced by any kind of other advantages.
Exploitable – Yes, it is exploited totally by CRL and ALPES through organizing and developing all the potential resources and capability to satisfy customers.
3.Model of business operating
Valuable – The business model of the new joint venture will be beneficial and valuable, because the operation type of ALPES falls into vertical integration which helps the new joint venture be independent from the third party suppliers as well as following the market trends more flexibly than other competitors.
Rare – This business model is rare because the new join venture will own and maintain its sufficient production facilities, equipments and land by itself that make it unnecessary to consider the unstable influence from suppliers.
Inimitable – The business model of vertical integration could be imitated by competitors to pursue more market shares and profit through investing more time and input.
Non-Substitutable – There may be no better substitutable business model for the new joint venture of producing SPF eggs to react to market change and demand so quickly than vertical integration which has been helping ALPES beating two major competitors in the industry.
Exploitable – The vertical integration business model is exploited as well as used especially for ALPES’s further and deep development by the family-owned company.
Alternatives and recommendations
Engage in the JV with ALPES
Pros:
- Fill the profit growth gap ( According to the financial analysis, the JV has a 25 percent average ROI, this is 5 percent higher than then company’s strategy growth rate).
- As the two largest SPF eggs buyers InterVet and Anchor had expanded their operation in Mexico, there is great chance to adding a new growth pole to the firm.
- JV is a cheaper and safer way to expend business (only 2 millions dollar)
- Gain understanding of the Mexican market environment
Cons:
- Facing the Mexican unstable economy and currency
- Needs to deal with family-owned style management
- Needs to deal with the negative image left by the contamination
- Never succeed in 50 years
- Dismiss the JV proposal and concentrate on SPAFAS
Pros:
- Avoids a new market with political and economical instability.
- Eliminate the potential management conflicts with non-strategy family owned business
- Concentrate on SPAFAS or explore other opportunities
Cons:
- Loss a profitable business growth opportunity in Mexico
- Loss potential revenue on the increasing demand of SPF eggs
- The JV opportunity might be pass to competitors and loss first mover advantage
- Establish a 100 percent owned SPF eggs farm in Mexico
Pro:
- Form a subsidiary which shares the same value and goals with the parent company (less management conflict).
- Have full control over the subsidiary and pocket all profit
Cons:
- High investment cost and risk to establish a new SPF egg farm in Mexico
- Might not be able to compete with the APLES since it has solid relationship with the two main SPF eggs buyers and local suppliers
According to the internal and external environment analysis as well as financial analysis, it is advisable for CRL to invest in ALPES and form a joint venture relationship since the ALPES has a impressive liquidity and Debt-to-Equity Ratio (Exhibit 1). It is not only a great opportunity for CRL to expand internationally, but also a profitable project financially. Based on our calculation, the average ROI in the next 5 years would be 25% (Exhibit 2). This can perfectly solve the “strategic growth gap” and fit the company’s strategic growth plan. At the same time, this investment is relatively safety for CRL. According to the payback period calculation, CRL can get their initial capital back in 4 years and 132 days (Exhibit 3) even though they share the profits equally with ALPES. Besides, CRL has abundant ability and human resources to implement this project without distracting their current business in America. Compared with other reasonable alternatives, choosing the joint venture can satisfy the decision criteria and diverse the risk of domestic development to a greatest extent.
Implementation:
Charles River Laboratories has decided to choose “Alternative 1: invest $2 million to obtain 50% equity”. In order to accomplish a successful joint venture, a specific short and long run plan is listed as follows:
Short-run action plan (Exhibit 4 Gantt hart):
1-7 days: CRL should organize a research team to visit Mexico and meet with the Romero family. It is necessary for CRL to get the facts (e.g. facilities, social and economic environment, and management structure) about Group IDISA and establish trust between them, thereby eliminating the board’s concern.
8-12 days: A board meeting should be held as soon as research team finished the exploratory trip. Shaughnessy should convince board members the integrity and competence of ALPES and gain their support to carry on the project. Also, they need to identify the decision criteria and check whether joint venture is in accord with it.
13-19 days: CRL and ALPES need to draft a contract and seek for lawyer’s help regarding at the form, context, legal liabilities and indemnity clause of the contract.
20-31 days: Sending the draft contract to each other in exchange for different ideas follows next. Aiming at the family-owned structure of ALPES, a standard business routine (e.g. the times of board meeting, explicit strategic plan and operating budget) should be included in the contract. A final contract should be prepared.
32-39 days: Through several rounds of discussion and negotiation, CRL and ALPES should schedule a final meeting, sign up the contract and process work handover.
Long-term plan:
1)The new joint venture should lay stress on seeking expansion and growth to dominate Mexico market in the long-run. CRL should keep in tight touch with ALPES and try to achieve optimal rate of return and gain more market shares through planning to reach economics of scale.
2)CRL as an investor can consider increasing investment to gain more equity if the joint venture partnership generates a desired profit. Adversely, if the new relationship performs not well enough, they can gradually withdraw their capital from ALPES and find another market.
3)Under the influence of NAFTA, CRL would take full advantage of the taxation policy, low cost of labour in Mexico etc. It would be possible that CRL moves facilities and plants to Mexico. However, the risk of remittance regulation in Mexico also should be considered.
Contingency plan: CRL should have a formal agreement with ALPES up front. The agreement can state that if the JV ‘s yearly net income fell lower than 70 percent the projected figure, CRL should be entitled for the projected net profit, only leave the residual profit to the JV. Also under the same condition, CRL needs to have the right to dismiss the current management team and appoint the new team.
Exhibit 1: ALPES liquidity and Debt-to-Equity Ratio before forming the JV
Exhibit 2: Return on investment in the next 5 years
Exhibit 3:Payback period calculation for CRL’s 2million investment
Exhibit 4: Short-run action plan by using Gantt hart