Charles River Lab Case
As a global market leader, Charles River Laboratories (CRL) is considering a joint venture with ALPES, a family-owned franchise and sole producer of specific pathogen-free (SPF) eggs in Mexico. Charles River Lab is serving over 15 countries worldwide with production and supply of laboratory animal models for research, development and testing of new pharmaceuticals. With the increasing demand of SPF eggs worldwide, Dennis Shaughnessy can easily envision the long-term growth of CRL and profitable opportunity with the joint venture. However, Jim Foster, Chief Executive Officer of CRL and the board members have to consider this proposal as a growth opportunity that could easily be available to their competitors in the market.
Analysis
Charles River Laboratories had a strategic growth objective of 12 per cent to 15 per cent annually and its entire business …show more content…
bye 20 per cent. Joint Venture is an effective approach to fill “strategic growth gap” of 5 percent to 8 percent per year. CRL considered one of the most profitable divisions in the industry, served customers in biotechnology firms, animal health, medical device, diagnostic companies, hospitals, academic institutions and government agencies worldwide. Also as a current owner of Specific Antigen-Free Eggs and Avian Services, (SPAFAS), CRL scheme was to produce inactivated human vaccines from commercial eggs to SPF eggs. Convincing human vaccine producers to switch from commercial eggs to SPF eggs was costly and time consuming. International franchise fee did not contribute enough in SPAFAS revenue and growth which led the plan purchase the franchises in Mexico (ALPES) to establish the supply of SPF eggs internationally. ALPES realizing the future growth opportunity refused the offer but willing to comply a joint venture with CRL. With SPAFAS’s international growth of 50 million in four to five years, the demand of SPF eggs should be considered as a crucial factor to attain competitive advantage in the market. On the other hand, refusing the venture with ALPES being a major supplier of SPF eggs to two of the largest animal vaccine producers would affect the strategic leadership of CRL in the future.
Reasons to Accept the Venture
Since NAFTA was introduced in 1994, the increased production in Mexico and doubled the demand of production of SPF eggs.
As ALPES is major supplier to INTERVET, a Netherlands based world largest poultry vaccine manufacturer purchases 80 per cent of SPF eggs from ALPES. INTERVET also projected double demand of SPF eggs to four million units within one year. Furthermore, the changes in European and Asian vaccine regulations points to an increase in demand of SPF eggs in Mexico more than 10 million units per year. With more than 1 billion in revenues and operations in 55 countries, INTERVET is a major customer for SPF eggs. Another Mexican subsidiary to Boehringer Ingelheim of Germany was responsible for most of the remaining ALPES sales. Both companies invested millions of dollars in Mexico establishing new plants for the increase demand of vaccine in Europe and Asia. However, due to the increasing demand, both companies began importing SPF eggs from the United Sates. CRL has to realize the long-term growth opportunity and strategically position themselves with the given opportunity of the Joint
Venture.
One of the major issues for Jim Foster is the potential distraction for SPAFAS as it continued to expand in U.S. If CRL decides to reject the proposal of the joint venture, ALPES would consider the second option to partner with SPAFAS’s primary competitor, Lohmann-Tierzucht International of Germany. Being the primary competitor of SPAFAS, Lohmann-Tierzuch would invest in ALPES, which would result in reducing the demand of SPF eggs in SPAFAS of United States. INTERVET and ANCHOR would also rely on ALPES as their primary supplier of SPF eggs in the near future. CRL will not only lose the future revenue from ALPES but eventually lose the future growth of SPAFAS in United States.
The joint venture proposal required CRL to invest 2 million dollars to establish a new facility as IDISA would contribute land, building and other assets owned by ALPES. Investing 1.5 million dollars for pre-incubation facility, 250,000 for management services and 250,000 for ALPES goodwill projected 2 million dollars in sales first year, 3 million dollars in sales next year and more than doubling in year four. With an exchange of 50% of ALPES equity and equally shared profit, the decision of investing 2 million dollars seems profitable.
Another main concern of board was the risk of investment in Mexico having an unstable currently and uncertain market. ALPES is a member of IDISA group of company, as a family owned business was able to successfully establish a group of companies with profitable revenue and growth. With a 2.9 million in annual revenue for IDISA and 200 million in Grupo Romero, their business is still establishing growth in a transition market like Mexico. Both major customers for SPF eggs are investing millions of dollars in Mexico to establish future long-term growth and attain competitive advantage in the market. Investing capital in low-cost areas such as Mexico will project profitable figures in revenue for both ALPES and CRL in the near future.
Analysis
Charles River Laboratories had a strategic growth objective of 12 per cent to 15 per cent annually and its entire business …show more content…
bye 20 per cent. Joint Venture is an effective approach to fill “strategic growth gap” of 5 percent to 8 percent per year. CRL considered one of the most profitable divisions in the industry, served customers in biotechnology firms, animal health, medical device, diagnostic companies, hospitals, academic institutions and government agencies worldwide. Also as a current owner of Specific Antigen-Free Eggs and Avian Services, (SPAFAS), CRL scheme was to produce inactivated human vaccines from commercial eggs to SPF eggs. Convincing human vaccine producers to switch from commercial eggs to SPF eggs was costly and time consuming. International franchise fee did not contribute enough in SPAFAS revenue and growth which led the plan purchase the franchises in Mexico (ALPES) to establish the supply of SPF eggs internationally. ALPES realizing the future growth opportunity refused the offer but willing to comply a joint venture with CRL. With SPAFAS’s international growth of 50 million in four to five years, the demand of SPF eggs should be considered as a crucial factor to attain competitive advantage in the market. On the other hand, refusing the venture with ALPES being a major supplier of SPF eggs to two of the largest animal vaccine producers would affect the strategic leadership of CRL in the future.
Reasons to Accept the Venture
Since NAFTA was introduced in 1994, the increased production in Mexico and doubled the demand of production of SPF eggs.
As ALPES is major supplier to INTERVET, a Netherlands based world largest poultry vaccine manufacturer purchases 80 per cent of SPF eggs from ALPES. INTERVET also projected double demand of SPF eggs to four million units within one year. Furthermore, the changes in European and Asian vaccine regulations points to an increase in demand of SPF eggs in Mexico more than 10 million units per year. With more than 1 billion in revenues and operations in 55 countries, INTERVET is a major customer for SPF eggs. Another Mexican subsidiary to Boehringer Ingelheim of Germany was responsible for most of the remaining ALPES sales. Both companies invested millions of dollars in Mexico establishing new plants for the increase demand of vaccine in Europe and Asia. However, due to the increasing demand, both companies began importing SPF eggs from the United Sates. CRL has to realize the long-term growth opportunity and strategically position themselves with the given opportunity of the Joint
Venture.
One of the major issues for Jim Foster is the potential distraction for SPAFAS as it continued to expand in U.S. If CRL decides to reject the proposal of the joint venture, ALPES would consider the second option to partner with SPAFAS’s primary competitor, Lohmann-Tierzucht International of Germany. Being the primary competitor of SPAFAS, Lohmann-Tierzuch would invest in ALPES, which would result in reducing the demand of SPF eggs in SPAFAS of United States. INTERVET and ANCHOR would also rely on ALPES as their primary supplier of SPF eggs in the near future. CRL will not only lose the future revenue from ALPES but eventually lose the future growth of SPAFAS in United States.
The joint venture proposal required CRL to invest 2 million dollars to establish a new facility as IDISA would contribute land, building and other assets owned by ALPES. Investing 1.5 million dollars for pre-incubation facility, 250,000 for management services and 250,000 for ALPES goodwill projected 2 million dollars in sales first year, 3 million dollars in sales next year and more than doubling in year four. With an exchange of 50% of ALPES equity and equally shared profit, the decision of investing 2 million dollars seems profitable.
Another main concern of board was the risk of investment in Mexico having an unstable currently and uncertain market. ALPES is a member of IDISA group of company, as a family owned business was able to successfully establish a group of companies with profitable revenue and growth. With a 2.9 million in annual revenue for IDISA and 200 million in Grupo Romero, their business is still establishing growth in a transition market like Mexico. Both major customers for SPF eggs are investing millions of dollars in Mexico to establish future long-term growth and attain competitive advantage in the market. Investing capital in low-cost areas such as Mexico will project profitable figures in revenue for both ALPES and CRL in the near future.