Failed strategic alliances: Danone case study

Multinational firms face many difficulties in entering a foreign market, especially if they have a different language, business culture, regulations, and market expectations; globalization can be a costly choice. According to Griffin and Pustay (2015), the organization has to organize decision making, distribution, advertising, marketing, and financial decisions. One way to avoid the long and expensive path of starting from zero in a new market is to make alliances with native companies and share revenue in exchanging knowledge and experience in the local market.     

Commercial alliances are not guaranteed success and often fall apart because of poor planning, internal competition, government intervention, or contradictory interests. Joint ventures are a risky bet, especially for transnational companies like Danone that have ninety percent of their sales in foreign markets and sometimes experienced terrible consequences in the intent of entering a new market without the proper leverage. This paper has the purpose of analyzing the dangers of a wrongful selection of partners and the lack of risk assessment by using the Danone case in their failed intent to enter the Chinese and India’s markets.

Strategic Alliances

            A company attempting to access a new global market could enter into a strategic partnership with a local corporation to work together to accomplish shared objectives. Many reasons could lead companies to decide to ally. According to Griffin and Pustay (2015, p.365), partnering with a local company will help maneuver through government obstacles or fierce rivalry by working with a local company; it will help reduce risks and provide new knowledge and experience, synergy, and competitive advantages.

Companies may have a short or long-term arrangement. The partnership may be structured or informal; one of the best approaches to render the partnership more dynamic and binding is by forming a new business called a Joint Venture, established to combine resources to carry out a particular business operation. A corporation that wishes to extend its delivery network to new countries will usefully enter into a Joint Ventures arrangement to import local business goods and thereby benefit from an established distribution network. According to Kalia (2020), Joint Venture is a “child company with two-parent corporations with mutual capital and shares under a contractual arrangement.” A joint venture has a precise aim, whether created for a single reason or a continuing strategy, and proceeds are shared between them.

Some nations still have prohibitions on outsiders accessing their economies, rendering a joint venture almost the only way to do business with a local company in the region. China is one of these countries since its economy is controlled by the government and allows foreign participation by Joint Ventures. This particular model is referred to as “state capitalism” (Hirson, 2019), which enables the nation to achieve rapid industrialization and modernization, political and economic stability, protect essential resources, and foster China’s political power.

Danone’s Joint Ventures struggle

Danone is an iconic French dairy products company created in 1919, was one of the first European transnational companies in the XX century; as early as 1941, the company established an American branch, in 1970 becomes France’s largest producer of beverages and baby food, in 1972, Danone merged with BSN-Gervais; in the 1990s acquired several food companies in Europe, Asia, and Latin America. (Our history, 2020).   

Danone was one of the first companies to obtain the B Corporation certification; these companies are a modern form of organization that combines commitment with social causes and profit, are mandated by statute to contemplate the effect of their choices on their staff, consumers, vendors, culture, and community. These businesses aim to build a group of leaders, driving a global movement of people who use industry as a force for good. (An international community of leaders, 2020). Danone is a pioneer in creating a business with social responsibility or “enterprise à mission” model, recently recognized by the European legislation (Impact, 2020).

Danone is an example of the success of a company taking over foreign markets by alliances with local companies; the French corporation contributes with its financial strength, manufacturing experience, and advanced communications, and the local partner contributes with its understanding of the legal structure of the host country, the political process, the sales systems and the buying preferences of local customers. However, as stated by Griffin and Pustay (2015, p. 379), strategic alliance partners need to be mindful of a variety of pitfalls that can compromise the effectiveness of their cooperation agreements. This pitfall involves partners’ incompatibility, access to information, disagreements over earnings sharing, lack of control, and changing political or economic circumstances.

Danone brawls in China

Two of the most significant drawbacks in Danone’s expansion strategy were China and India markets because of different reasons: in 1996, Danone entered a Joint Venture with Wahaha, the largest bottled-water marketer in China; By 2005, Danone had found that its collaborators had set up mirror firms that produced and marketed goods nearly similar to the Danone-Wahaha Joint Venture. These mirror firms infringed of the deal, by operate using the Joint Venture’s publicity and distribution networks.

Danone started an expensive and infructuous legal dispute in twelve lawsuits and arbitration cases within China and six other jurisdictions; the problem has grown into an international crisis and has been one of the major joint venture conflicts in China’s history. The Danone-Wahaha conflict possibly arose because Danone seems to have found profit more important than proper corporate governance. According to Tao and Hillier (2008), Danone did not engage in China’s regular management and service, a policy that seems to have rebounded in several ways.

Danone management may have skipped out on gaining valuable market experience in China and may have avoided clients owing to negative news. Another factor contributing to the failing venture is that the Chinese government and court backed the Chinese company and rejected the international arbitration resolutions. China has been taking advantage of the state capitalism system; after twenty years, many companies learned by the hard way that the Chines government will protect their local companies whatever befalls and will not honor the rule of law or international arbitration resolutions.

Danone difficulties in India.

    A joint venture with the Wadia Group and the formation of a biscuits business became the first time Danone entered India in the 1990s; this venture involved a conflict about the Tiger brand’s intellectual rights. The disagreement ended when Danone quit the biscuits market worldwide. After few years, Danone attempted to enter India’s market for a second time in the early 2000 and failed to develop a market for its dairy beverages, babies’ nutrition, and medical nutrition; this attempt ended in 2015 when the local company paid out and kept the business.

In 2018, following three unsuccessful attempts to make a mark in one of the world’s fastest expanding consumer packaged goods markets, Danone agreed to shut down its milk company in India. Although Danone has been in the Indian market for several years, it has struggled to develop a sustainable portfolio. The company only sold four items, and the company’s products were available in 20 cities, spanning 200,000 retail outlets. Still, its flagship yogurt was only available in six cities. (Mintra, 2018).

Danone strategy in India was the opposite than in China since, in India’s market, the company tried to introduce new products and to be aggressive in pursuing revenue; meanwhile, in China, the company give up the administration to the partners; both strategies were erroneous and failed because the company underestimates their partners, the business culture, the local legal system, and the costumer’s necessities. 

Conclusions

Strategic alliances are a risky endeavor; according to Pustay and Griffin (2015, p. 379), the most critical reasons strategic partnerships failed are incompatibility amongst teams, conflicts about access to information, and disagreements about earnings distribution, loss of influence, and changing circumstances. Recently, in October 2020, Danone had another break down in their alliance’s strategy, since the French company sold its interest in Yakult Honsha, dissolving its twenty-year-old relationship with the Japanese probiotic drink producer, as the tie-up struggled to generate the collaborations anticipated and the anticipated revenue. (Gretler, 2020). This new failure should make Danone to reconsider the current alliances’ strategy since globalization has been slowed down by protectionism and COVID-19 pandemic endangering international enterprises’ associations.

References

A global community of leaders. (, 2020). B Corporation. Net. Retrieved from https://bcorporation.net

Gretler, C. (2020, October 6). Danone to sell final $570 million stake in Japan’s Yakult. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2020-10-06/danone-to-sell-remaining-570-million-stake-in-japan-s-yakult

Griffin, R., and Pustay, M. (2015). International Business. A Managerial Perspective. (Eighth Edition). Boston. Pearson.

Hirson, M. (2019, February 7). State capitalism and the evolution of China Inc. Testimony before the U.S.-China Economic and Security Review Commission. Retrieved from https://www.uscc.gov/sites/default/files/Hirson_USCC%20Testimony_FINAL.pdf

Impact. (, 2020). Danone. Retrieved from https://www.danone.com/impact.html

Mintra, S. (2018, January 12). Danone to shut down its dairy business in India. Mint. Retrieved from https://www.livemint.com/Companies/YPDquZkbD3CAOR4IL9n0DN/Danone-to-shut-down-its-dairy-business-in-India.html

Our History. (, 2020). Danone. Com. Retrieved from https://www.danone.com/about-danone/ourhistory.html

Tao, J., and Hillier, E. (2008, May-June).  A tale of two companies. China Business Review. Retrieved from https://www.jonesday.com/files/publication/6027415e-bc9d-44b2-9e90-f8ef4870150d/presentation/publicationattachment/a602d7dc-b34c-4f3a-8041-fdde482927ac/a_tale_of_two_companies.pdf