Flight Engines Limited
Introduction
This paper discusses a case of joint venture in the aviation sector. Specifically, this paper gives further answers to questions from the actions made by the Flight Engines Limited in its connection with Indian firms. It is inevitable that globalization and international business wouldn’t be included in this paper since the focus of the case is the merging of Foreign Service firm (i.e. FEL) and the local firms (Indian Air Force and Component Repairs Limited).
This paper also provides the nature of doing business overseas as well as the reasons for globalization. At the end part of the paper, recommendations and answers to the questions of the case of FEL have been available.
Terms and Conditions of Trade for Repair and Overhaul Business
Commercial aircraft maintenance, repair and overhaul (MRO) services is straightforwardly connected to the size and operation of the commercial aircraft fleet. The type of maintenance, size of airline, and the type of service provider are the factors that may cause variations to the needs of the MRO of aircraft operators and their options of servicing aircraft. Most of the time, the main players in this market were independent service providers and the airlines themselves. The larger the airlines, the more MRO services they in-house taking advantage of economies of scale which smaller carriers lack.
Engine manufacturers for instance, have found that the MRO market is very lucrative, especially as profit margins for original engine sales went down during the 1990s. In lieu of selling engines, some Original Equipment Manufacturer (OEM) began selling power of flight hours through leasing arrangements. Maintenance relationships with the OEMs were often preferred by the airlines as leasing of aircraft and engines grew. As smaller European airlines move into the U.S. market, there was a growing role of OEMs along with the increase in global activity by airlines and MRO market has become much more global.
Nowadays the MRO industry, where Flight Engines Limited belongs, is slowly beginning to recover from the traffic slowdown of late 2001 and was predicted to resume its steady growth over the next few years. It is thus suggested that consolidation among airlines and further competition from OEMs will create further opportunities for alliances and consolidation. In order to compete, MRO firms will have to offer a wider array of services with greater geographical coverage. Such condition is appropriate and suitable to the larger firms and it is expected that the number of providers will decrease over the next years as smaller players leave the market or merge.
As many professional service firms do not compete on price and cost not even primarily maximizing profits, it is enormously crucial for professional service firms to analyze both costs and benefits carefully prior to coming up a decision to go global. Otherwise, internationalization or globalization may turn out to be a formula for success or it may be even reduce the probability of success in its most extreme sense which is survival. As a preparation for a plan of globalizing services, professional service firm managers and owners should be able to anticipate undesirable outcomes in order to formulate counter measures before implementing a global strategy.
Flight Engine Limited has a key characteristic as a professional service firm. The bulk of the earnings is based, on the professionals’ application of their expertise, either in terms of a fixed fee for the service, sometimes on a ‘no cure, no pay’ basis, or in terms of a project contract stipulating payment at an agreed fee for the man-hours required to complete the task. Yet another major difference lies in the nature of potential opportunism. For the professional service firm, opportunism is typically linked to diagnosing a larger, more complex problem than necessary, thus increasing the number of man-hours required. On the other hand, the opportunistic professional service firm may involve more junior personnel than initially agreed, which may lead to both an increase in the number of hours required and possibly also a decrease in the quality of the solution delivered. Therefore, an ethical requirement for professional service firms is that short term gains need to be given up in situations of conflicts of interest, in order to protect the professional reputation and client trust required for long term survival.
One of the major challenges with the specialized knowledge typically constituting the foundation of professional value creation is the fact that the client generally does not have sufficient knowledge to judge the quality of the service delivered. In other words, the information asymmetry is substantial ( 1984). For this reason, high ethical standards enforced by a profession or by the firm itself are required, if a firm is rightly to be called a professional firm.
The terms and conditions for trade in the repair and overhaul business can be accessed through a four-part typology of how international transactions in services as provided by the General Agreement on Trade in Services (GATS).
- Cross-border flows
- The movement of a consumer to a supplier’s economy
- The movement of a commercial organization to the consumer’s economy
- The movement of an individual supplier to the consumer’s economy
Free trade and investment in services occurs when service providers and consumers are able to interact through whichever mode they decide, free of any regulatory distortions. Any policy that impedes service producers and consumers interacting through any of these modes of supply is an impediment to international service transactions.
The GATS does not define market access. Article XVI (1) obliges members to grant market access to scheduled industry subsectors, while Article XVI (2):(a)-(f) contains a list of quantitative measures considered to be limitations on market access. Article XVII (1) defines national treatment as treatment no less favorable than that accorded to like domestic services and service providers subject to the limitations and conditions set out in the country’s schedule of commitments. An uncomfortable overlap exists between the two commitments, with national treatment being interwoven with market access. Despite this confusion, it appears that the GATS application of market access was applied to broadly cover barriers to both foreign and domestic suppliers, that is competition policy ( 1996; 1996).
Doing Business Overseas
Flight Engines Limited is considered and belonged to the professional business service firms (PBSFs). These PBSFs,\ have been accounted as a great part of the growth of globalization.
(1992) define International Joint Venture as “a separate legal organizational body representing the partial and fractional holdings of two or more parent firms, in which the headquarters of at least one is located outside the country of operation of the joint venture. This entity is subject to the joint control of its parent firms, each of which is economically and legally independent of the other”.
Reasons for Doing Business Overseas
Right from the end of the twentieth century until entering the twenty-first century, globalization has greatly improved the worldwide economies without showing a sign of reduced growth in global sectors. This astonishing and fairly apparent global and international development can be accounted to a couple of factors. One factor is the level of education of both buyers and suppliers raising the requirements for firms trying to achieve a knowledge-based competitive advantage substantially. Another important reason is the trend for outsourcing with the combination of the rapid diffusion of information leading to an increasingly globalize economy.
Most firms find that in this competitive context, given the fact that they also need a critical mass of knowledge workers in any area in order to stay ahead of competitors, specialized knowledge-based services are better outsourced and sought from expert firms. Firms in all industries outsource activities which are not core to their own competitive edge, and expert service firms typically are able to offer both better quality and lower cost than internalized staff. In addition, with the rapid development of new knowledge in all areas of society, small internalized staff units face an ever increasing danger of their knowledge being outdated. Consequently, knowledge intensive service firms are found relating to all types of industries as well as to the public sector. These knowledge intensive service firms are different enough to challenge the industrial logic presently dominating most discussions of management and value creation, because they are fundamentally knowledge-based as opposed to capital-based. And they are different enough to warrant more research into their characteristics and their management practices, in order to achieve maximum value creation, not only in the knowledge intensive service firms themselves, but also in their client firms.
Despite the fact that several threats and disadvantages can be cited along with the commencement of international business, international firms are not even shaken by such risks. There is no wonder why globalization has been on the rise since its success depends on international firms providing trade to other countries. With the above-stated reasons on why international firms globalize their business operations, it is noticeable that these advantages are of greater importance than the perceived risks.
Venturing into Foreign Markets
It has been highly suggested and recommended that careful and pro-active planning should be in front when trying to invest in foreign markets. This may refer to the choice of entry-mode which particularly affects a firm’s performance in the foreign trade ( 1986). Firms involving in international or foreign trade may include businesses that are outsourcing their services and operations or commit to an international joint venture in order to gain entry into the foreign market of choice.
The Technology Transfer
International business is usually defined as the transfer of factors of production owned by organizations across national borders, or the transfer of parts of that organization across national borders (1989). Technology transfer, on the other hand, refers to the application of technology to a new use, or to a new user for economic gain (1981). Technology transfer is generally thought of as being product-embodied, process-embodied, or person-embodied. That is, technology transfer can be said to occur through the specific transfer of products, processes, or people. Most of the emphasis in the research and practitioner literature has been on the latter two types of technology transfer-process-embodied and person-embodied. To the careful reader, however, technology transfer, which occurs by process or person transfer, never occurs without some overarching organizational framework. Thus, if we augment this basic taxonomy of technology transfer by including organization-embodied factors, the processes of international business and those of technology transfer become virtually inseparable.
Technology transfer can then be considered to be the core, or the heart of international business. Flight Engines Limited does have processes of technology transferred to India. However, when it comes to international business, technology transfer is fundamental to the accomplishment of international business. Moreover, the success of the international business transaction under consideration frequently depends on the effectiveness of the technology transfer embodied in that transaction (1991).
The twin concepts of international business and technology transfer share some additional important overlaps. Both are crucial to the business community, yet they are extremely complex issues involving economic, political, social, and cultural factors. When issues of complexity emerge, as is the case with international business and technology transfer, simplifying assumptions and frameworks are usually sought to help explain the complexity. From a simplified model, implications can then be derived for research or practice. Very often those implications are derived using mathematical techniques, and later those implications are related to some observed reality. This represents the inductive approach in science.
Broadly interpreted, technology transfer is an integral part of the process of international business. To be successful in international business, the firm must initially possess some specific comparative advantage, which it then seeks to transfer across national borders. In navigating this terrain, the firm concerns itself with the overall effectiveness of its products, people, processes, and indeed, its organization. All of this occurs through technology transfer. To illustrate just how this process works, we begin by establishing a somewhat “abstract” model of the competitive market as an initial benchmark. We then introduce some major “imperfections” that, in reality, are all non-economic factors, to determine whether technology transfer is desirable from the corporate point of view.
Assessing Potential Impediments to Service Sector
Foreign direct investment (FDI) plays a key role in services trade. For foreign suppliers of many services, such as communications, financial, retailing and various business and professional services like the Flight Engines Limited, it is important to establish a commercial presence in a market to allow ongoing direct contact with consumers. Restrictions on FDI can therefore potentially have significant implications for services trade.
The first major problem in the analysis of Foreign Direct Investment barriers is the lack of information on the restrictions imposed in each economy. With this regard, the Flight Engines Limited has already coped up with this during its previous connection with the Indian agency.
There have been very few mergers and acquisitions in the world airline maintenance industry as a whole. There was quite a lot of merger and acquisition activity in the United States in the 1980s, but overall, particularly international mergers and acquisitions are almost non-existent. The reason for this is the prohibitive stand by regulatory authorities world-wide. Consequently airlines have been forced to use other ways than mergers and acquisitions in their search for more competitiveness. There is a strong need to consolidate the industry but, largely due to government control, airlines can only go halfway along the consolidation path.
Potential Risks for FEL (termination of the agency)
Quitting a certain joint venture would not be a simple termination. It would also involve risks. Such risks would apparently be the claims of the previous partner of the FEL since it is one of the provisions of the agreement between the agency and the FEL. However, FEL can reduce or lessen the exposure claims through professional and smooth exit of FEL stating its purpose of termination.
Under a joint venture, there are adaptable reasons why termination exists. It could be the dissolution due to partner’s ownership structure to exploit economies of scope as well as government policy changes ( (1987). Consequently, duration and survival appear to be unacceptable measures of performance since termination of a joint venture may be the result of success, failure, or simply an adaptation to changes in the environment.
In this case, FEL has the permissible and acceptable reason in terminating the joint venture with the agency. In other words, FEL may use the “changes in a partner’s environment” or the “changes in partner’s corporate strategies” (1993). In following this approach to termination, FEL will be able to lessen its exposure to claims. Generally, joint venture termination is not due to failure but rather an adaptation to changes and the aim for better opportunities.
Knowledge Creation and Transfer in International Service Firms
The globalization and even the viability of service firms at the beginning of the twenty-first century clearly depends on the ability of these firms to produce, transfer, and guard knowledge that they use in providing services to clients. From the simplest financial services that a bank provides to a foreign client or a foreign affiliate of a domestic client, to the most complex management consulting project that involves extensive interaction between the service provider and the client firm, each of these situations requires the service provider to take specialized knowledge and apply it to a client’s needs, while trying to retain the relevant skills, structures, and other appropriable aspects of that knowledge. In short, the service firms rely fundamentally on their ability to produce the knowledge that they sell to clients, and equally on their ability to utilize and protect that knowledge from competitors. Knowledge is the key competitive advantage in the service sector ( 2000).
This may not seem like a particularly striking statement, with all of the emphasis being placed on knowledge management in recent years (1995; 1997). Even so, it is quite remarkable that this one dimension is the key to competitiveness time and again in the services sector. In other sectors such as manufacturing or extractive industries, such issues as natural resource availability and production scale economies often play very large roles in creating competitive advantage, along with knowledge such as patentable products or production processes. In services, knowledge is the critical element, and frequently it cannot be protected by patents, trademarks, or copyrights.
The ways that these firms move knowledge among affiliates are numerous, beginning with the relatively costly transfer of experts to foreign assignments, and perhaps ending with low-cost, frequent streams of electronic mail (e-mail). Since the key knowledge has been found to be relationships with clients and knowledge of the industry, these things are particularly hard to transfer, except when the client is a multinational with which the service firm deals in another country (or other countries). Since the service firms generally had more than half of their business with multinational clients, the possibility to utilize knowledge of these clients is very real.
In addition the firms often have proprietary methodologies for producing their services. These methodologies can be transferred along more traditional lines, namely through manuals, training programs, and various telecommunications means.
Recommendations and Trade Proposal (CRL & FEL joint venture)
The recommended structure of business agreement between the Component Repairs Limited and Flight Engines Limited can be broken down into major subjects through an outline:
I. Purpose and character of a joint venture or agreement
In this section of agreement is a clear statement stating the major goals or strategy adopted by the foreign partner (i.e. Flight Engines Limited). Similarly, the major goals or strategy of the local partner should also be made available. In addition to that is the identification of the products, industries, markets, or customers that will be served.
II. Contributions of each partner
The first and most obvious form of security for both firms is the capital. Included therewith is the existing land, plant, warehouse, offices, or other facilities. In merging of two firms, each manufacturing design, processes, and technical know-how should be laid out in order to visualize each party’s capabilities. The technical assistance of workers and their training should be provided by the FEL to the local partner. In return, the local partner (CRL) will provide the workforce needed as well as the location and property. Furthermore, it will be the local partner’s job in promoting strong relationship with the local government, financial institutions, customers, suppliers and the like. Both parties will have to work for the development and advancement of the management.
III. Responsibilities and obligations of each partner
The FEL shall be in charge of providing the machinery and equipment while the local partner (CRL) will be of assistance in the procurement and installation in the locality. Moreover, it would also be the post of FEL in constructing and modernizing the machinery and equipment. Personnel management will then be handled by the local firm since the workforce comes from the locality.
IV. Equity ownership
This section has been very critical to most of the cases of joint venture termination. Hence, there would be a need for clear and understandable agreement regarding equity ownership. This would involve granting equity to foreign partner for manufacturing and product technology and industrial property rights. Correspondingly, granting equity to local partner for land, plants, warehouses, facilities and others. More importantly is the provision of specification of ownership share of foreign partner and of the local partner. Upon realizing this agreement, it would be the foreign partner that has the advantage most of the time in the international joint venture.
V. Capital Structure
This section is the provision of the structure of capital. It would involve the equity capital or what is termed as financing. This is the money being raised by the firm in exchange for a share of ownership in the company. In addition to equity capital is the loan capital which is the part of company’s capital structure being raised through loans both national and foreign. Another important consideration is the working capital that measures how much company assets available in building the business. In thinking ahead, there should also be discussion on the provisions for raising future loan funds since it will be useful in the advancement of the business and to get the future program started. Accordingly, there should also be guarantees to loans by both partners.
VI. Management
This section deals with the management of the joint venture. It would initially involve the appointment, composition, and authority of the board of directors as well as the executive officers of the joint venture. After the selection and formation of the joint venture entity, strategic and operational planning follows.
VII. Supplementary agreements
This section involves licensing and technology agreements as well as management contracts. There should also be provisions on technical service agreements between partners.
VIII. Managerial policies
Under this section are the specification and the declaration of dividends. After the joint venture earn a profit, such earnings can be used as the payment to shareholders (dividend) or reinvesting the profit in the business through expansion and extension or could be also used in debt reduction or repurchasing of share.
IX. Settlement of disputes
Settlement of disputes is handled by the board of directors and the executive committee. In addition to that, there is also mediation and arbitration should misunderstandings and arguments occur.
X. Knowledge Transfer
Given that knowledge is the key competitive advantage in the producer services sector, firms need to find ways to build their knowledge resources, share that knowledge among affiliates, and protect it against incursions by rivals. Since the knowledge ordinarily resides in people, other than that which has been codified into some kind of medium such as a document or a computer program, the firm faces the need to find and hire high-quality people, to train them in the business, and to retain them over time.
One general strategy that has emerged, in particularly the advertising and consulting industries, is the use of teams of people to provide the services to clients. By creating and using teams, the firm is able to take the offensive in developing new knowledge from the co-operation among team members, and take the defensive in making sure that team knowledge is not able to be ‘stolen’ by a defecting team member. Both of these attributes enable the firm to build a stronger competitive advantage.
The kind of knowledge that seems to produce key competitive advantages is relationships with clients. This knowledge includes person-based knowledge of key individuals at the client firm; team-based knowledge of the client firm’s people involved in the overall relationship; and historical ‘knowledge’ embedded in the supplier/client relationship that has built up over time. The latter two types of knowledge are more appropriable by the firm, since no individual can capture the full relationships. Firms should aim to build up those kinds of knowledge, since they can provide the most durable competitive advantages.
In pragmatic terms this means always looking for ways to ensure that services are provided by multi-person teams. It means building relationships with clients that last for years, and that thus build up the historical trust and willingness to co-operate of long-term relationships.
Conclusion
FEL need not worry about gaining profit out of the joint venture with the new firm since usually most foreign firms have the advantage of bigger share and control over the local partner. In addition to that, as long as the recommended joint venture agreement will be followed prior to merging, the foreign firm (i.e. FEL) has the majority control of the venture. This is for the simple reason that most of the investing foreign firms are richer than the local country. Given that the recommendations stated in this paper will be pursued, there would be nothing much that FEL should worry about as the joint venture will surely goes right and well as planned.
Credit:ivythesis.typepad.com
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