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Eli Lilly entered into a joint venture agreement with Ranbaxy to produce and market pharmaceuticals on the Indian market in the early 1990s. Eight years later, the parties are re-evaluating the venture. Ranbaxy was considering selling its stake and Lilly was unhappy with aspects of the arrangement as and wanted to re-frame it going forward. Eli Lilly brought a number of assets to the deal, including its patents and its brand name. Ranbaxy brought access to channels in the Indian market and expertise in drug synthesis. Ranbaxy could produce drugs at costs 50 to 75% lower than those of comparable U.S. plants (Schaan and Kelly, n.d.).
The Joint Venture
The arrangement between Eli Lilly and Ranbaxy was set up as a joint venture. Lilly wanted to procure inputs from Ranbaxy, but also saw a deal as an opportunity to enter the Indian market. Ranbaxy saw teaming with Lilly as opportunity to grow, and by 2000 Ranbaxy was the market leader selling 20 billion rupees per year. The JV was set up with 50% ownership for each company, and directorship was also split evenly. The venture succeeded early, primarily on the basis of the operating managers Mascarenhas and Gulati being able to work well together. However, there were underlying differences. In particular, Eli Lilly had built its business and drug developer and innovator, while Ranbaxy was primarily a generics maker. Ranbaxy was also developing its business internationally, something that was not the case when the venture was founded. While the venture was successful for Eli Lilly, Ranbaxy was concerned that it did not fit with their new business model. The issue, then is, where this JV fits for Ranbaxy, and how the company should proceed. If Ranbaxy chooses to divest, Eli Lilly needs to have a plan for how to proceed. It enjoyed a great working relationship with Ranbaxy; the myriad other Indian suitors might not be partners of the same caliber. Lilly also had the option of buying out the partnership and making the venture a wholly-owned subsidiary, since that was now allowed under Indian law.
There are a number of different approaches to market entry. The joint venture option is attractive for a number of different reasons. JVs provide the ability of the parties to converge their skill sets, something that occurred with this joint venture. Eli Lilly had significant market power overseas and Ranbaxy gained from Eli Lilly's credibility and ethical standards. However, most joint ventures are characterized by problems, especially when there is lack of parent firm support and no plan in place for how to terminate the relationship (QuickMBA, 2010).
The joint venture served the interests of both parties when it was formed, but eight years later the circumstances have changed. It is unclear whether Ranbaxy in particular would enter into this joint venture again if it had a choice. That said, the credibility it gained through the joint venture has been leveraged to give it the number one position in the marketplace. For Eli Lilly, the benefits of the joint venture remain. In particular, having an Indian partner helps it to access distribution channels and diffuse political risk. The company would like to keep the joint venture going, but this will only happen if the JV is still a good fit with Ranbaxy's new international expansion strategy.
The first thing that needs to happen is that Eli Lilly must plan for this meeting. The ball is essentially in Ranbaxy's court, and if the company wishes to unwind the relationship, Eli Lilly management needs to have a plan for that. Unwinding a joint venture can be a costly endeavor. For Eli Lilly, not only would it need to buy out the Ranbaxy stake in the company -- at what could be a substantial cost -- but it will also need to negotiate the other terms of the exit, something that could prove to be costly. Once a basic understanding of how Eli Lilly wants to approach this situation has been developed, it needs to then enter into the meeting with Brar.
Turowski (2005) notes that joint ventures generally are more successful when the parties take the approach of building trust at from the outset of the process. This was certainly the case when this joint venture formed, and one of the reasons it was able to be so successful so quickly. It is possible, however, that when the second and third ventures failed, that Eli Lilly violated some…[continue]
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The question is whether to seek another partner or to buy out the company. One of the benefits of the JV has been the Ranbaxy distribution network. Using another Indian partner would mean a change in this network, and that could compromise earnings potential because as the largest pharmaceutical company in India Ranbaxy has the best distribution network. In addition, there are cultural considerations -- other Indian companies may