You are the CEO of a large battery company that has a long andfamous history in the design, manufacture, and distribution ofdifferent types of batteries that are used in a growing variety ofindustries. Your company is organized into two strategic businessunits.
One business unit (Business Unit 1) specializes in high-endbatteries for critical systems. Some of your best known batteriesare used to power cardiac pacemakers (heart implants), kidneydialysis systems, portable diabetes treatment systems, and evenspace-based life support systems (electronic monitors). Many ofthese batteries incorporate the use of highly exotic, rare-earthmaterials whose specific compounds and mixtures are highlyproprietary to your company. Your patents (as well as yourdistinctive way of experimenting with materials) have pretty muchgiven you a lock on this part of the business. These exoticbatteries represent the highest form of technology development andrefinement that your competitors respect and consider as beyondcutting-edge science. Several executives from the automotiveindustry have commented that these advanced batteries will do muchto boost electric-powered vehicles in the near future, but only ifyou can scale the business and drive down unit production costs. Assuch, it has been difficult for other battery companies to imitatewhat you are doing. As a constant worrier, you feel that yourcompetitive advantage lead-time, while impressive, seems shorterthan you would like. Your R&D skills and depth are excellent,but you feel as if your manufacturing process is
missing something, since you have typically experienced a longglide-path in reducing your unit costs with every new batterysize.
The other business unit (Business Unit 2) is better known for itswell-recognized battery brands that used in long-lasting,conventional lithium-ion and alkaline batteries for a broad rangeor devices, including watches, cell phones, and even laptopcomputers. Customers love your batteries because of theirlong-lasting qualities, but they pay a price premium for yourofferings. Unlike that of some of your competitors, your lithiumbatteries are high-quality and do not pose the same degree of firehazard in laptop computers and smartphones. The extra safetyfeature is a tribute to your company’s high ethical standards indevelopment and manufacturing, but it also means that your unitcosts will probably remain higher than that of rivals. However,Business Unit 2 is beginning to face growing competitive pressuresfrom other manufacturers who are seeking to erode your sizablemarket share. You are not excessively worried about yourcompetitors yet, but you realize that the battery industry hasbecome significantly more capital-intensive over the years.Business Unit 2 has significant brand equity that captures muchcustomer loyalty, but here too, you begin to wonder how long youcan keep charging a price premium for lithium batteries –especially given the rise of new, ultra-modern manufacturingfacilities in the Far East that compete on scale and volume.
A year later, your company has been approached by a smaller batterycompany (call it X) based in Asia. They approach you with aninformal request to begin investigating the possibility of workingtogether on advanced battery technologies. Although you have heardabout the company from attending industry conferences in the recentpast, you never thought that X was a serious player in the batteryor power systems business. Most of the business for X hastraditionally come from making standard alkaline batteries that areincluded in remote controls for television sets, telephoneanswering machines, small portable electric fans, low-end digitalcameras, and other low-cost, mass-produced consumer electronicsproducts. Since X makes standard alkaline batteries for othermanufacturers, they really have no brand equity at all, as theyhave never sold directly to consumers. On the other hand, X justrecently completed building a large battery manufacturing facilitythat is designed to provide a wide range of low-cost batteries toall types of consumer electronics companies. From what you hear atindustry conferences, X hopes to serve not only its traditionalcorporate customer base (portable television manufacturers, phonemanufacturers, and digital cameras), but also companies that makehigh-end digital watches, laptop computers, tablets, and portableDVD players used in long airline flights. X has said nothing aboutwhat its new manufacturing facility can do, but there is strongreason to believe that X has the talent and the machinery in placeto produce both alkaline and lithium-based batteries. Even moreuncertain is how well X can formulate the necessary chemicalcompounds and mixtures that are needed to produce the right balanceof smooth, sustained power flow for long-lasting but stable batterylife for higher-end products. Little is known about X’smanufacturing skills as it relates to quality control and batterysafety features either. Yet, X is determined to push ahead since itwants to become the battery source to all kinds of businesses.Since most consumer electronics companies are outsourcing non-coreoperations to improve their own internal measures of financialefficiency, many of them have decided to use X’s batteries ratherthan to make them on their own. You have also heard rumors thatmanagement at X is also anxious to expand beyond the alkaline andlithium business segments to move up the power systems food chain.X’s young CEO even drives a prototype
electric vehicle made by Tesla, but claims that on some day, atsome point, he/she could beat Tesla in its own game. Because youhave some lingering doubts about the depth and sophistication ofX’s management team and technology, you politely decline theopportunity to work with X.
Six months have passed, and you are invited to lunch by a friendand former executive who now works at a medical device electronicsfirm (call them MECO) that builds external portable diabetesmonitoring systems and external portable cardiac defibrillators, aswell as high-end implantable cardiac pacemaker devices that areinstalled in the patient by hospitals and doctors. MECO’s external,portable medical products are designed and sold for the consumermarket, not for hospitals or long-stay medical facilities. They areparticularly well-suited for consumers who are caring for lovedones in the home, where portable medical devices may be needed as astopgap measure before emergency help or professional help arrives.(Think portable defibrillators that should be in every section of ahigh-end steakhouse restaurant!) At the lunch meeting, MECO isinterested in purchasing large quantities of your most advanced,proprietary, exotic-material batteries for use in their newlydesigned, implantable cardiac pacemakers. Having worked for you along time, your friend knows that you have the best scientificreputation and skills in batteries to back up your products. As theconversation lingers, he/she also tells you that MECO hasdramatically improved its power system efficiency and maintenancecosts for its external portable defibrillators several quartersahead of schedule. You asked how they were able to accomplish this,since working with portable medical technology requires a differentset of manufacturing skills (e.g., lower cost, long productionruns, specialized proprietary techniques) than those used forimplantable cardiac products made for use in hospitals (e.g.,small-quantity, custom-order, but higher unit-cost production).He/she responds by saying that MECO has contracted out most oftheir battery manufacturing to a company called X, and that theywere instrumental in helping us figure out how to best manage powerconsumption and drainage issues in electronic devices.
Your friend tells you the following: The alliance is structured ina serial manner whereby X initially provides the battery, and MECOdoes the rest. Increasingly intrigued and simultaneously perturbedby what you hear, you ask for some more specifics about what thisrelationship is all about. He/she tells you it works like this: Youconcentrate your effort on designing the latest medical devicetechnology and focusing all of your efforts on making sure that itcan work in a variety of different environments (e.g., climates,temperature, altitude, humidity). Once you have finalized a robustportable defibrillator design, you provide it to X, who in turnmanufactures the batteries according to the size, weight, and howlong you want the defibrillator to keep running. He/she has visitedX’s battery manufacturing facility, and tells you how marveledhe/she was: “These people are able to run such a tight ship – theircost management and yield improvement skills are top-notch. Thebatteries come out perfect without any seams, leaks, dents, orirregularities on the surface. Yet it is difficult to isolate whichdepartment within X is responsible for which activity it does. Theexternal coating of the batteries can take a beating. It’s almostlike they can coax more out of their equipment without compromisingquality. We could not attain the same kinds of battery durabilityand sustainability in our own factory. It seems like everythingrelated to quality in their facilities is so seamless orinterconnected that it is difficult to know where one set ofcompetences end and another begins. I don’t know how they do it,but it’s not obvious that we could duplicate it on our own.” Xships
the batteries directly to you, and is even willing, for an addedfee, to build the surrounding surge protectors, voltage regulators,transformers, and a few other components that are integrated withthe portable defibrillator’s power system to complete a good dealof the end product. What X cannot do is to design the actualmicroprocessor “brain” that controls how all of these componentsare integrated together in the actual medical device.

You have decided to investigate the possibility of working withX on a limited project in the battery field. You think a jointventure would work best with X, and you are willing to contributemanagement and technical oversight from Business Unit 2. You wantto begin working together on a battery that is already mature (forreasons of simplicity, assume it is a lithium-ion battery used forwatches and cell phones). In your initial negotiations with X, youpropose that they contribute funds to the joint venture that wouldhouse a jointly-owned plant in the U.S. so that you don’t have towait for the battery to be produced and shipped from X’s far-awayAsian factory. The negotiating team from X looks at you in a funnyway, but in turn, proposes its own counter-offer. X does not wantto build a battery factory in the U.S., but in turn has proposed towork with you on a more advanced line of batteries – some of whichuse exotic, rare earth materials in the core. According to X’smanagement, they prefer an alliance vehicle “that is not soelaborate and formal like a joint venture.” In fact, they wouldprefer something along the line of a co-development pact. Keepingyour answer short, what would be some of the important points ofnegotiating with X? What are some key issues that you need toconsider? How would you frame them in your proposal? What are somekey issues that X is probably considering? How will these issuesshow up in X’s proposals? (Provide your answer and supportingrationale in a table for both companies using short bulletpoints.