Harvard Case - Danone V Wahaha (A): Who is Having the Last Laugh?
"Danone V Wahaha (A): Who is Having the Last Laugh?" Harvard business case study is written by Isabella Chan, Jiangyong Lu, Zhigang Tao, Shangjin Wei. It deals with the challenges in the field of Strategy. The case study is 35 page(s) long and it was first published on : Jun 12, 2008
At Fern Fort University, we recommend that Danone restructure its joint venture with Wahaha to realign the power dynamics and secure its long-term interests. This restructuring should involve a significant shift in ownership towards Danone, clearer governance structures, and a stronger emphasis on Danone's brand and expertise. This approach will allow Danone to leverage its global resources and expertise while minimizing the risks associated with cultural differences and conflicting business strategies.
2. Background
This case study examines the complex relationship between French multinational food giant Danone and Chinese beverage company Wahaha. In 1996, the two companies formed a joint venture, with Danone holding a 51% stake. This partnership aimed to leverage Danone's global expertise and Wahaha's strong local market presence to dominate the Chinese beverage market. However, the partnership quickly encountered challenges due to conflicting business strategies, cultural differences, and a lack of clear governance structures.
The main protagonists are Danone, represented by its CEO at the time, Frank Riboud, and Wahaha, led by its founder and CEO, Zong Qinghou. Riboud sought to expand Danone's global reach and leverage its brand recognition, while Zong Qinghou aimed to maintain control over his company and its local market dominance.
3. Analysis of the Case Study
This case study can be analyzed using several frameworks:
a) Porter's Five Forces:
- Threat of New Entrants: High, due to the low barriers to entry in the Chinese beverage market.
- Bargaining Power of Buyers: Moderate, as consumers have many options, but brand loyalty plays a role.
- Bargaining Power of Suppliers: Moderate, as Wahaha relies on local suppliers, but Danone has access to global suppliers.
- Threat of Substitutes: High, as consumers can choose from various beverages, including locally produced ones.
- Competitive Rivalry: High, with numerous domestic and international players vying for market share.
b) SWOT Analysis:
Danone:
- Strengths: Global brand recognition, strong product portfolio, expertise in manufacturing and distribution.
- Weaknesses: Lack of understanding of the Chinese market, cultural differences, potential for conflict with Wahaha.
- Opportunities: Growing Chinese beverage market, potential for expanding into new product categories.
- Threats: Competition from local players, potential for government intervention, cultural clashes.
Wahaha:
- Strengths: Strong local market presence, deep understanding of Chinese consumers, cost-effective manufacturing.
- Weaknesses: Limited global reach, lack of brand recognition outside China, potential for conflict with Danone.
- Opportunities: Expanding into new product categories, leveraging its strong local distribution network.
- Threats: Competition from international players, potential for government intervention, cultural clashes.
c) Value Chain Analysis:
The joint venture's value chain was disrupted by the conflicting interests of Danone and Wahaha. Danone focused on brand management, global marketing, and product innovation, while Wahaha prioritized cost-effective manufacturing, local distribution, and market penetration. This misalignment resulted in inefficient operations, duplicated efforts, and a lack of synergy.
d) Business Model Innovation:
The joint venture initially aimed to leverage a hybrid business model combining Danone's global expertise with Wahaha's local knowledge. However, this model failed due to cultural differences, conflicting priorities, and a lack of clear governance structures. Danone's attempt to impose its Western business model on Wahaha proved ineffective, leading to a breakdown in trust and communication.
4. Recommendations
Danone should take the following steps to restructure the joint venture:
a) Increase Ownership Stake: Danone should acquire a majority stake in the joint venture, ideally reaching a controlling 75% ownership. This will provide Danone with the necessary control to implement its strategic direction and ensure alignment with its global goals.
b) Implement Clear Governance Structures: A new governance structure should be established with a clear division of responsibilities between Danone and Wahaha. This structure should prioritize transparency, accountability, and open communication.
c) Leverage Danone's Brand and Expertise: Danone should leverage its global brand recognition and expertise in product development, manufacturing, and marketing to enhance the joint venture's offerings. This will help to attract a wider customer base and increase market share.
d) Foster a Collaborative Culture: Danone should promote a collaborative culture that respects both Chinese and Western perspectives. This will involve open communication, cultural sensitivity, and a willingness to learn from each other.
e) Implement a Long-Term Strategy: Danone should develop a long-term strategy for the joint venture that aligns with its global goals. This strategy should focus on sustainable growth, market expansion, and product innovation.
5. Basis of Recommendations
These recommendations are based on the following considerations:
Core competencies and consistency with mission: Danone's core competencies lie in its global brand, product innovation, and expertise in manufacturing and distribution. These strengths are crucial for success in the Chinese beverage market.
External customers and internal clients: The joint venture needs to cater to the needs of Chinese consumers while aligning with Danone's global standards. This requires a balance between local market knowledge and international expertise.
Competitors: The Chinese beverage market is highly competitive, with both local and international players vying for market share. Danone needs to leverage its strengths to gain a competitive advantage.
Attractiveness ' quantitative measures: While specific financial data is not provided in the case, the potential for growth in the Chinese beverage market is significant. Danone's increased ownership and strategic direction will likely lead to improved profitability and market share.
6. Conclusion
Danone's initial approach to the joint venture with Wahaha was flawed, leading to conflict and ultimately undermining its long-term success. By restructuring the partnership, Danone can leverage its global strengths while respecting the local market dynamics. This approach will allow Danone to achieve its global goals while ensuring the long-term sustainability of the joint venture.
7. Discussion
Alternatives not selected:
- Complete withdrawal: This option would have minimized risks but also sacrificed the potential for growth in the Chinese market.
- Maintaining the status quo: This option would have perpetuated the existing conflicts and ultimately led to a decline in the joint venture's performance.
Risks and key assumptions:
- Cultural differences: Overcoming cultural differences and fostering a collaborative culture remain key challenges.
- Government intervention: The Chinese government's policies and regulations could impact the joint venture's operations.
- Competition: The intense competition in the Chinese beverage market could affect the joint venture's market share.
8. Next Steps
- Negotiate a new joint venture agreement: This should include a revised ownership structure, clear governance guidelines, and a shared vision for the future.
- Develop a strategic plan: This plan should outline the joint venture's long-term goals, market strategy, and product development roadmap.
- Implement cultural training programs: This will help Danone and Wahaha employees understand each other's cultures and build stronger working relationships.
- Monitor performance and adjust strategies: Regular performance reviews and adjustments to the strategic plan will ensure the joint venture remains competitive and successful.
By taking these steps, Danone can transform the joint venture with Wahaha into a successful and sustainable partnership, ultimately achieving its goal of dominating the Chinese beverage market.
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Case Description
In April 2007, Zong Qinghou, founder of Hangzhou Wahaha Group and chairman of all its joint ventures formed with Danone, divulges details about Danone's plan to buy a 51% interest in Wahaha's non-joint venture subsidiaries and related entities that are owned or managed by Zong's family interests. The disclosure of what is supposed to be a trade secret sparks off a series of public accusations, followed by lawsuits by each partner against the other. On the one hand, Danone indignantly retorts that its takeover plan is grounded in a breach of its contractual interest by Zong. Danone alleges that Zong has been making many of the same products as the joint ventures have under the same "Wahaha" trademark through a parallel network of production facilities that he or his family own or manage. He also uses the joint ventures' distribution channels for selling them. On the other hand, Zong argues that the "Wahaha" trademark has never officially been transferred to the joint ventures and complains of Danone's lack of effort throughout. He also accuses Danone of attempting to monopolise China's beverage market by driving out national brands like Wahaha, which are part of China's cultural heritage and thus are the heart and soul of Chinese people. As a way of protesting, Zong resigns from his post as chairman at the joint ventures. Danone then appoints Emmanuel Faber, chairman of Danone Asia Pacific, as the new chairman, but the legitimacy of this appointment is denied by Wahaha. This case illustrates the conflicts in interests, practices and cultural values that foreign investors may encounter with their local partners when doing business in China. It also examines the dynamics of revenue sharing, control rights and contract enforcement between foreign and local partners.
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