This activity is based on a case study into how two chemical companies in South Africa addressed the strategic and cultural issues involved in a joint venture. The author was involved in setting up the joint venture and ends his case with a critical assessment of the measures implemented to ensure the venture’s success on the cultural front.

Learning outcomes

After completing this activity you will:

● Gain insight into the issues involved when two companies that are culturally different, but in the same country, set up a stand-alone joint venture.

● Be aware of the issues of power involved in such a venture and the difficulties in resolving them.

● Understand how active measures can promote the creation of a new organisational culture within such a joint venture.

YOUR ASSIGNMENT

Read the following case study and then answer the questions that follow it.

WHY A JOINT VENTURE?

A couple of years ago, two large chemical manufacturers in South Africa – AECI Limited and Sasol Limited – agreed to combine certain operations and to form a separate entity as a joint venture. The new venture formed was called Polifin. As the company now stands, AECI and Sasol own 80 per cent of the shares with the remaining 20 per cent being traded on the stock exchange or held in employee share benefit schemes. Although the company is now run as a separate entity, it is still effectively controlled by the board of directors and shareholders of both AECI and Sasol.

The objective of the project was to combine complementary manufacturing plants from the two separate companies to benefit from the effects of internal transfer pricing and the synergies that would be created. It was felt that greater economies of scale, better production scheduling, more efficient customer service and the creation of a monopolistic niche could be achieved by the joint venture. The reason for creating such a joint venture, and not just a sales agreement, was to create a company that was separate from the other two companies and one that could grow and develop products and processes that would not be achieved with just a sales agreement. Furthermore, the size of the combined forces would give credibility to the operation in the market place.

BRINGING ABOUT THE JOINT VENTURE

From inception, a separate management team was created to run this project. The team included managers and staff from both founding organisations as well as new staff. It was expected to co-ordinate, create and manage the changeover of functions and staff to the new company. Decisions had to be made to match reporting methods, to resolve personnel issues (such as staff grading, pension benefits, medical aid and staff pre-requisites) and to determine the type of control given to divisions. The project was made more complicated than the start of a brand new operation by the fact that these functions already existed and now had to be modified or changed to fit with the new strategies and directions taken.

A new plant was built to increase the capacity of the organisation and a completely new head office was created, with sales, some division heads and corporate administration being included. This move, again, provided management with a number of decisions as to where to locate, the type of offices and the size required and allocation to be given to the various divisions.

The two companies involved (AECI and Sasol) had very different reporting requirements as well as information needs. Information had to be supplied at different times to each during the month and the information-gathering process often had to be duplicated to supply exactly the information requested. The fact that these two companies had different year ends also complicated life within Polifin. Fortunately, the product flow was in a linear fashion with most divisions only being reliant on one other division. Consequently, there were not a lot of serious cultural issues that the divisions had to address.

CULTURE ISSUES

As already mentioned, a large percentage of the staff came from AECI and Sasol. The companies were run differently, with AECI being used to much more informal management and decentralisation of power to the divisions. Sasol on the other hand was a fairly hierarchical company with protocols that were written and unwritten law within the organisation (for example office sizes were determined by the specific level of seniority in the organisation, with formal titles being used and staff having to go through the ‘right’ bureaucratic channels to get issues addressed). The cultural issues will be addressed at various levels.

National culture

Two of the subcultures within South Africa are English and Afrikaans. The English culture is based on open and informal communications, whereby the nature of authority is frequently challenged. The Afrikaans culture on the other hand is characterised by distinct respect for elders and discipline (especially within a school environment) and the need to obey this discipline and not to question authority at all stages.

Professional culture

As is typical of the chemical industry, senior management mainly had backgrounds in chemical engineering and in this respect found it easy to understand one another. Other functions, such as accounting, were staffed by people with similar backgrounds.
Consequently, the issue of professional culture did not appear to have much effect on the joint venture.

Organisational culture

The existence of two subcultures led to a problem in defining the best corporate culture for the venture. The culture of the AECI staff was informal with a number of business issues being discussed over a ‘beer’ in the evening and an informal, open-door, first-name basis. On the other hand, the Sasol staff were characterised by a head of the division controlling all the information flows in and out as well as being the representative with senior management. The culture was hierarchical and formal with much empire building behind the scenes.

The analysis above reveals the problem faced at Polifin. Two distinct operating styles needed to be satisfied and supported, or even modified to create a new culture.

POWER ISSUES

The need to win the confidence of senior managers, as well as the need to assert power over other divisions, led to power issues.
A couple of examples are required to illustrate this:

● The corporate accounting division had the task of co-ordinating and reporting financial information monthly, quarterly and annually. Because of the stringent requirements of the controlling shareholders and the fact that the head was second in charge of the joint venture, and responsible for the day-to-day running of the organisation, the division was given a lot of power to force compliance with their reporting requirements. The problem was that the divisions that came from the AECI group were used to their own standards and deadlines and refused to co-operate. The result was that at the end of each month, a couple of telephone calls were required to ensure compliance.

● Senior staff from Sasol wanted their own parking bays and would really create a stir if anyone else was found using them.
The need to affirm their seniority was strong.

● Ex-Sasol division heads would only pass on information about their figures on ‘a need to know’ basis. They protected their information base, apparently hoping to be able to use informational advantages as leverage during the year. It reflected the culture of hierarchy and forcing of reliance so that they were noticed.

A frontstage to the organisation could be identified, showing it to be fairly dynamic without too many formal procedures in place, one which was undergoing a few teething problems in its rush to meet consumer demand. However, there was also a backstage where the culture was definitely one of power struggles. The environment had an adversarial feeling in which ex-Sasol employees faced ex-AECI employees, both sides supported by ‘their’ divisions. Clearly the full benefits of synergy were not being obtained.....

Questions

1. What were the reasons compelling the two companies to set up a joint venture?

2. What do you consider to have been the main cultural issues at the outset?

3. How were these issues addressed at the start? What was done later to deal with the cultural problems?

4. The author suggests how the cultural conflicts could have been addressed from the start of the venture and suggests that a new culture will eventually replace the previous ones. Give your opinion of his suggestions and propose any other actions that could have been taken both at the start and during the development of the joint project.