Charles Rivers Laboratories (CRL) is evaluating a joint venture proposal that a Mexican company creates a state-of-the-art specific pathogen-free (SPF) egg for the vaccine. If the proposal is approved, CRL is going to invest 2 million dollars to the Mexican company. However, CRL must consider the potential risks of cooperation.
Charles River Laboratories has a large variety of customers more than 15 countries, which means CRL is already capable to expand overseas market. The demand of SPF eggs is very high due to making flu vaccine.
More than 100 million SPF eggs were consumed for influenza vaccines each year. The demand even exceeds its supply between 5 to 10 percent worldwide. Accordingly, the operation margin will be improved around 20 percent and revenue will be doubled in four years. Therefore, joint venture is valuable.
The rarity of normal eggs switching to SPF eggs is relatively high. First, Charles River Laboratories is still using standard eggs to produce influenza vaccines.
Many franchisees haven’t totally changed to cultivate SPF eggs. They still use old chicken farm, This goes to show that the traditional eggs haven’t been replaced and new eggs are rare. Second, most companies don’t intend to take an adventure to try new products due to political instability and corruption. However, SPAFAS took long time to do sufficient research on APLES. It means the rarity exists because not many companies decide take advantage of new eggs.
The degree of inimitable and Non-Substitutability is medium.
Even though not many companies start to produce vaccine by SPF eggs, there are still some like APLES working on it. Therefore, technology might be imitated by several companies to some extent. As far as APLES, it is the only company producing SPF eggs in Mexico. The popularity and loyal customers are strong so substitutes are hard to enter. However, other companies can still use the current standard eggs to make vaccine instead of higher price SPF eggs.
The degree of joint venture exploitability is high. According to high demand and double revenue prediction in the case, cooperation of CRL and ALPES could increase production of SPF eggs and highly benefit from sales to both of them.
The most highly used method when conduct the external analysis of a company is PESTEL Analysis, which includes political, economic, sociocultural, technological, environmental and legal aspects.
Politically, in 1994, The North American free trade agreement came into effect, which allowed the free trade between USA, Canada, and Mexico. This political alliance benefited the economic development. The flow of capital, goods and services became more smooth and swift among these three countries. Due to the concerns from strong competition some business quit. Whereas, increased demand of vaccine production from U.S. and Canada led to the increased supply in Mexico.
Economically, as the case implied, demand for specific pathogen-free (SPF) eggs had exceeded available supply by five to ten percent across the globe. Furthermore, after the M&A, SPAFAS more than doubled its annual revenues while improving its operating margin to nearly 20%. To support the growth, CRL continuously invested capital in expanding domestic SPF egg production capacity. Alpes is the sole supplier in Mexico, which makes it more instrumentally beneficial from the production. Yet, problems such as endemic corruption, economic instability and unstable currency hinder the development of business in Mexico.
Social and culturally, without being vaccinated against Salmonella and Campylobacter, poultry are easily got contaminated which excreted severe human health risk to people who were fed with these. Frankly, the recognition from the public of importance of vaccination would benefit the business like CRL and ALPES in the long run. Additionally, the bond the friendly relationship between the two family-style director boards has been combined successfully.
Technologically, having been founded in 1947, CRL was the global market leader in the commercial production and supply of laboratory animal models for use in discovery and research and the development and testing of new pharmaceuticals. CRL has taken the leadership position in SPF eggs production after the acquisition of SPAFAS. Additionally, Alpes was the only franchisee in Mexico. Given that production capacity is less than needed and highly sanitary standards are expected to be met, challenge still exist.
Environmentally, the old informal “handshake agreement” can be still influential when joint venture is functioned. And then, the market needs more production which means demand is more than current storage supply. The business opportunity is huge ever. Board directors are divided into two piles, one is supportive of the proposal and another is more objective to this business move. The freezing situation stands between Alpes and CRL: Alpes is in urgent need of capital investment, while CRL claims the acquisition.
Legally, Asian and European vaccine regulations are getting more and more strict and high-quality standard and tend to be more preferable to the vaccine industry. It is quite a challenging move prior to export products to theses countries.
While Alpes supply eggs to the tow biggest buyers in the industry, there are just two providers of the SPE eggs beside them. Furthermore, IDISA has a chance to make capital and compete in different area in the industry due to the 4 different companies that make profit in different research areas. As a result rivalry degree is comparatively (low).
ALPES has the largest market comparing by other competitors in the same field. Actually, mice are the only threat they use, but this threat is has not too much influence and not strongly effective. Also, because of the expensive if this area buyers try to find another options. So, substitutes within the industry are (low).
The threat of substitutes degree is from (medium to low) because of the difficulty of success they face due to the specialized in pharmaceuticals. But expertise in this area can find some of the facilities in less expensive areas easily. Furthermore, it is hard to the new entrant getting into industry because that needs a very high level requirement. SPF has a small market share in pharmaceutical and the lack of facilities prevent agriculture company supporting. ALPES has large market share because it is a provider to the two largest producer of vaccine.
Power of buyers is low. Supplier of eggs has option to increase the prices due to the highly demands one of this demand is the tow biggest companies ALPES made further research into SPF eggs, which is between 5 and 10 percent. And this increasing in prices justified that the revenue in the first four years was almost doubled.
There is little agriculture company that provides SPE eggs by facilities with high prices that’s why the power of suppliers is (high). Moreover, its hard to make high quality of good under the industries regulation and it is highly cost and expensive.
From the table above, we can see that the Debt-to-equity ratio is very low. It shows that ALPES has a potential to use more debt to earn revenue. However, the current ratio and Quick ratio are quite high. A current ratio that higher than 1 means the company is able to pay off its obligations, as this ratio is 8.903, we are sure ALPES is in a very good condition. Much similar to Current ratio, if a Quick ratio is higher than 1, then the company is able to meet their short-term liabilities. As this ratio is 7.901, we can say ALPES has no doubt to meet its obligations.
Forecast after joint venture
We can see from the chart above that, after joint venture, all of the profit margin, gross margin and operating margin will have an increase trend between year1 and year
The net profit margin indicates how much out of each dollar of sales a company actually earns. In year 5, the company will keep $0.23 in earnings for every dollar of sales. The gross margin represents the proportion of each dollar of revenue that the company retains as gross profit. In year 5 the gross margin will be 31.49%, therefore the company may retain $0.32 from each dollar of revenue generated to pay off liabilities. Operating margin gives us a view of how much a company’s operation can make on each dollar of sales. The company’s margin is increasing so it is earning more per dollar of sales. In year 5 the operating margin is 22.84%, this means that the company’s operation makes $0.23 for every dollar of sales.
Decision making by CRL whether invest up to $2 million in ALPES to built a joint venture in Mexican has to consider tow criteria: expected profit and facing risk.
The joint venture with ALPES is a good option for Charles River Laboratories. CRL invest up to $2 million to APLPES joint venture to create a state-of-the-art specific pathogen-free (SPF) egg farm in Mexican. Mexico’s trade policy implements the North American Free Trade Agreement (NAFTA) so it is open and welcome to foreign investment.
Joint venture can overcome entry barriers in a foreign market Save transaction costs
Provide new expertise and share resources, including specialized staff and technology Risks sharing with a venture partner
Invest $2 million is not a small name. Investment itself is a kind of risk. It takes time to build partnership with foreign business. ALPES is a small family company. The different between U.S. and Mexico in culture and management style is a problem. Mexico currency is unstable and Mexico is an uncertain market.
The following chart is the pros and cons of alterative two which is reject the proposal and no joint venture. As for this alternative, the pros can be illustrated in 3 aspects: CRL does have to invest extra 2 million capital into this project and avoid the loss and risk this performance may bring about. Cons can be elaborate in 3 aspects as well: if CRL declines to invest this joint venture, meaning giving up this opportunity and even worse leaves it to rivals and in a long run, maybe will jeopardize the benefit of the organization as a whole.
No invest risk
Discard opportunity to develop
Spare 2 million capital
Create a chance for competitors
Less benefit for CRL in long run
Growth about 12% and 15% annually and entire business by 20% is the strategic objective of Charles River Laboratories. Joint Venture can increase the sale, which helps CRL get this goal. Join a new market is a risk, but after visit members of Romero family. It can be seen that this family has knowledge, government influence, and trust. ALPES believes that this corporation should be successes. Invest in Mexico presents opportunities as well as challenges. But Mexico’s trade barriers have reduced by the implementation of the North American Free Trade Agreement. The business environment should be friendly.
Firstly, visit Mexico to get more information about ALPES and Romeros’ family. Both the CEO and the board of directors believe that this project could be trusted and this joint venture would serve profit. Secondly, this joint venture company is 50%-50% equity share. The profits also go halves SPAFAS would invest $2 million cash and ALPES would contribute their knowledge-existing SPF and commercial egg assets to the joint venture company. Thirdly, the direction of the investment: $1.5 million should be used to increase the SPF egg production capacity of the joint venture. $250,000 would be used to establish a pre-incubation facility; the left $250,000 would be used for ALPES to do some activity to build good social image and complete the services.
Charles River Laboratories (CRL) has to prepare a contingency plan for the certain events may interrupt normal business operations. CRL has to build a team to follow up operation of this joint venture to make sure the profit from $2 million investment.