Management control and performance of Indonesian-Australian international alliances

1. Management control and performance of Indonesian-Australian international alliances Associate Professor Hadrian G. Djajadikerta Program Director, School of Business Associate Director, Centre for Innovative Practice Edith Cowan University

2. Why form an alliance? • Business increasingly becomes more global. • Forming an alliance can increase market power, obtain new knowledge and skills, and share risks and resources.

3. Forms of alliances • Some alliances were set up based on short-term relationships, lasting only as long as it takes one partner to establish a presence in a new market. Sometimes they are even operated informally or even more, invisibly. • Others come in more formal and long-term based forms, which can lead to a full merger of two or more companies’ resources and capabilities.

4. Strategic alliances • In general, cooperative arrangements between organisations are termed strategic alliances.

5. Strategic alliances (cont’d) • Inter-firm alliances and cooperative arrangements take many different forms and are created for many different purposes • They include joint ventures, mergers and acquisitions, equity investment, buyer-supplier relationships, technology licensing, technology exchange, research and development agreements, and others.

6. Joint Ventures as a Means of Strategic Alliance • A joint venture emerges when at least two companies (the ‘parents’) pool resources to create a new, separate organisation (the ‘child’) • It is a form of partnership that is created to pursue some strategic purposes for the mutual benefits of the parents, although not necessarily for the same reasons for each parent • The two most important features of a joint venture are (1) shared control, and (2) the synergetic nature of cooperation.

7. International Joint Ventures (IJVs) • A joint venture is considered to be international when at least one of the parents has its headquarters outside the joint venture’s country of operation, or if the joint venture has a significant level of activity in more than one country. • The parent operating in its own home country is referred to as the local parent, whereas the parent operating outside its country of residence is referred to as the foreign parent.

8. Strategic Motives forIJV Formation

9. How do IJVs usually perform? • Despite their increased frequency and strategic importance, it has been shown that managing IJVs is a particularly difficult process. • They often perform unsatisfactorily and are comparatively unstable.

10. Please grab a piece of paper and a pen.

11. Scenario 1 • If you feel that you have capacity to open a business by yourself (including the financing), would you prefer to do it yourself or form a joint venture with a person sitting next to you? Note: If you form a JV, each of you will invest capital into the JV and participate actively in the JV’s decision-making activities.

12. Scenario 2 • You need a partner to open a business (i.e. you cannot finance the business by yourself), would you prefer to form a joint venture with a person sitting next to you, or with someone else? Note: If you form a JV, each of you will invest capital into the JV and participate actively in the JV’s decision-making activities.

13. Scenario 3 • You need a partner to open a business (i.e. you cannot finance the business by yourself), and you have received a business proposition to form an international joint venture from your Facebook friend who lives in Finland (you have never met your Facebook friend personally), would you prefer to form a joint venture with your Facebook friend, or with a person sitting next to you, or with someone else?

15. Scenario 1 • If you feel that you have capacity to open a business by yourself (including the financing), would you prefer to do it yourself or form a joint venture with a person sit next to you? Note: If you form a JV, each of you will invest capital into the JV and participate actively in the JV’s decision-making activities. • Why?

16. Scenario 2 • You need a partner to open the business (i.e. you cannot finance a business by yourself), would you prefer to form a joint venture with a person sit next to you, or with someone else? Note: If you form a JV, each of you will invest capital into the JV and participate actively in the JV’s decision-making activities. • Why?

17. Scenario 3 • You need a partner to open the business (i.e. you cannot finance a business by yourself), and you have received a business proposition to form an international joint venture from your facebook friend who lives in Finland (you have never met your facebook friend personally), would you prefer to form a joint venture with your facebook friend, or with a person sit next to you, or with someone else? • Why?

18. Complex Features of an IJV

19. What problems cause international joint ventures to be unstable and to perform unsatisfactorily? • The main problems in managing joint ventures stem from one cause: “there is more than one parent.” • Additionally, contractual agreements between partners in a joint venture are frequently executed under high uncertainty environmental conditions. Hence, all future contingencies cannot be anticipated at the beginning.

20. How to improve chances for IJV success? • Management control is widely regarded as a crucial feature for successful management and performance of IJVs. • Management control is a complex multidimensional feature of management, which is crucial to prevent transactional hazards and to improve the likelihood of success while maintaining flexibility.

21. Dimensions of Effective Management Control in IJVs • The mechanisms of control: the means by which control is exercised. • The extent of control: the degree to which parents exercise control. • The focus, or the scope, of control specifies the areas of the joint venture’s operation in which the parents exercise control.

22. Dimensions of Effective Management Control in IJVs (cont’d) • The selection of a control mode is a critical issue in managing international joint ventures, and this depends on the nature of the cooperative relationship. • The success of international joint ventures relates to fit among objectives and selective control focus, mechanisms and extent.

23. Control Mechanisms in IJVs • Control mechanisms in international joint ventures are the nature of control mechanisms exercised by parents. These mechanisms are commonly categorised using their degree of formality. • formal mechanisms • informal mechanisms

24. Control Extent in IJVs • Control extent in international joint ventures is the degree to which parents exercise control. • tighter vs looser controls  

25. Control Focus in IJVs • Control focus in international joint ventures is the areas of operation in which parents exercise control. • narrower vs broader controls  

26. Management Control in IJVs

27. In Control vs Out of Control • A system is in control if it is on the path to achieving its strategic objectives. • It is deemed out of control otherwise. • For the process of control to have meaning and credibility, an organisation must start with a solid planning process.

34. AT THE EDGE • In the context of IJVs, however, often it is difficult to know whether an IJV is indeed “IN CONTROL” or “OUT OF CONTROL” • There are critical moments where IJVs are at the edge – some do survive some don’t!

37. An empirical study of Indonesian-Australian IJVs

38. Synopsis • Changes in the complexity of relationships between international alliances and their environments have led to an increase in control problems, and there have been some calls for more research effort to be invested in investigating a suitable framework for control in international alliances.

39. Synopsis (cont’d) • This study takes in the emerging concept of self-organising systems into research on control systems in international joint ventures (IJVs), and analyses the relationships among variables within the complexity-control-outcomes framework.

40. Synopsis (cont’d) • Structural equation modeling is used to explore new insights into the roles of management control systems in affecting IJVs’ performance of Australian IJVs in Indonesia, from the perspective of alliance complexity constraints.

41. Rationale • Within the management accounting literature, quite a number of studies into control in interfirm alliances have emerged in the last decade or so (e.g. Cooper and Slagmulder, 2004; Dekker, 2003, 2004; Håkansson and Lind, 2004; Langfield-Smith and Smith, 2003; Mouritsen and Thrane, 2006; Mouritsen et al., 2001; Seal et al., 2004; Tomkins, 2001; van der Meer-Kooistra and Vosselman, 2000, 2006). • However, relatively less studies have explored control issue in the context of IJVs (e.g. Groot and Merchant, 2000; Chalos and O’Connor, 2004; Mjoen and Tallman, 1997).

42. Rationale (cont’d) • A review of study on IJVs in general has revealed that managing an IJV is a particularly difficult process. IJVs often perform poorly and are comparatively unstable (see e.g. Child and Yan, 2003; Devlin and Bleackley, 1988; Harrigan, 1988a, 1988b; Inkpen and Beamish, 1997Lorange and Ross, 1992).

43. Rationale (cont’d) • Management control has been regarded as one of the critical features for successful management and performance of IJVs (see e.g. Child and Faulkner, 1998; Geringer and Hebert, 1989; Glaister, 1995).

44. Rationale (cont’d) • However, the complexity of relationships between organisations and their environments have led to a need for more comprehensive views on IJV control research (see Chalos and O’Connor, 2004; Chenhall, 2003; Child and Yan, 1999; Groot and Merchant, 2000; Langfield-Smith, 1997; Makhija and Ganesh, 1997; Mjoen and Tallman, 1997; Otley, 1994, 2003; Otley et al., 1995; Spekle, 2001; Yan, 1998).

45. Rationale (cont’d) • Taking these on board, this paper takes in the emerging concept of self-organising systems into research on control systems in international joint ventures (e.g. Lorange and Probst, 1987). • The main purpose of this study is to investigate the roles of management control systems in affecting IJVs’ performance, from the perspective of organisational /alliance complexity constraints.

46. Main framework

47. The model of management control in IJVs

48. Lit Review & Hypothesis Development Organisational Complexity and Management Control H1.Organisational complexity is negatively related to formal control mechanisms. H2.Organisational complexity is positively related to informal control mechanisms. H3.Organisational complexity is negatively related to control extent. H4.Organisational complexity is negatively related to control focus.

49. Lit Review & Hypothesis Development Management Control and Autonomy H5. Formal control mechanisms are negatively related to the degree of autonomy of IJVs’ management. H6. Informal control mechanisms are positively related to the degree of autonomy of IJVs’ management. H7. Control extent is negatively related to the degree of autonomy of IJVs’ management. H8. Control focus is negatively related to the degree of autonomy of IJVs’ management.

50. Lit Review & Hypothesis Development Management Control and Redundancy H9. Formal control mechanisms are negatively related to the level of redundancy available to IJVs’ management. H10. Informal control mechanisms are positively related to the level of redundancy available to IJVs’ management. H11. Control extent is negatively related to the level of redundancy available to IJVs’ management. H12. Control focus is negatively related to the level of redundancy available to IJVs’ management.