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Home > Business Strategy Best Practice > Joint Ventures: Synergies and Benefits

Business Strategy Best Practice

Joint Ventures: Synergies and Benefits

by Siri Terjesen

Executive Summary

  • A joint venture (JV) is a formal arrangement between two or more firms to create a new business for the purpose of carrying out some kind of mutually beneficial activity, often related to business expansion, especially new product and/or market development.

  • An important first step is for each firm’s managers to review the firm’s business and corporate strategies to determine synergy with the objectives of a joint venture.

  • A second key step is to assess the suitability of the potential joint venture partner(s) for fit with the firm’s strategy, and compatibility during the life of the JV.

  • There are four basic JV types: consolidation (deep combination of existing businesses); skills-transfer (transfer of some key skill from one partner); coordination (leveraging complementary capabilities of all partners); and new business (combining existing capabilities, not businesses, to create new growth).

  • JVs can offer an array of benefits to partner firms through access to new and/or greater resources including markets, distribution networks, capacity, staff, purchasing, technology/intellectual property, and finance.

  • JV risks can arise from disparate communication, culture, strategy, and resources, and result in loss of control, lower profits, conflict, and transferability of key assets.

  • NUMMI is an example of a successful JV offering mutual benefits to its partners, General Motors (GM) and Toyota.

  • To succeed, JV partners must mitigate potential risk factors, including poor communication, different objectives, imbalanced resources, and cultural clashes.

Introduction

A joint venture (JV) is a formal arrangement between two or more firms to create a new business for the purpose of carrying out some kind of mutually beneficial activity, often related to business expansion, especially new product and/or market development. A JV is the most popular type of contractual alliance among firms; other types include formal long-term contracts, informal alliances, and acquisitions. JVs may take the form of a corporation, limited liability company (LLC), partnership, or other structure. The 100 largest JVs worldwide account for more than US$350 billion in revenues (Bamford, Ernst & Fubini, 2008). An increasing number of JVs involve foreign partners, in part due to laws in some countries that require foreign firms to partner with local firms in order to conduct business in that country.

Synergy to Strategy

An important first step is for management to review the firm’s business and corporate strategies to determine synergy with the objectives of a joint venture. In this process, managers can apply a range of strategy methodologies such as SWOT (strengths, weaknesses, opportunities, and threats), Porter’s Five Forces, stakeholder analysis, and the value chain to assess the firm’s strategy and future vision. Managers may then determine that the joint venture is not the most optimal organizational form for achieving the firm’s objectives, and that another form, such as a long-term contract, may offer a better strategic fit.

A second key step is to assess the suitability of the potential joint venture partner(s) for fit with the firm’s strategy, and compatibility during the life of the JV. Key questions here include:

  • Does the potential JV partner share the same business objectives and vision for the joint venture?

  • Is the potential partner firm trustworthy and financially secure?

  • Does the potential partner firm already have JV partnerships with other firms? If so, how are these performing?

  • How would you rate the potential partner firm’s performance in terms of production, marketing, customers, personnel, innovation, and reputation?

  • What are the general strengths and weaknesses of the potential partner? How do they complement our firm?

  • What benefits might the potential partner firm realize from the JV?

  • What risks might we be exposing our firm to in the JV?

A joint venture should only be formed when the parties mutually agree that this form offers the best possibility of optimizing opportunities.

Thirdly, the parties set out JV terms in a written agreement which addresses structure (for example, if it should be a separate business or not), objectives, financial and other resource contributions (of each partner), including the transferability of any assets or employees to the JV, ownership of intellectual property created in the JV, management and control responsibilities and processes, sharing/re-allocation of liabilities/profits/losses, resolution of disputes, and exit strategy. Joint ventures can be flexible, covering only a limited life span or a limited scope of firm activities.

Four basic types of JVs and their respective benefits are (Bamford, Ernst & Fubini, 2004):

  • Consolidation JV: value derived from deep combination of existing businesses.

  • Skills-transfer JV: value derived from the transfer of some key skill from one partner to the JV (or to the other JV partner).

  • Coordination JV: value derived from leveraging the complementary capabilities of all partners.

  • New business JV: value derived from combining existing capabilities, not businesses, to create new growth.

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Further reading

Books:

  • Child, J., D. Faulkner, and S. Tallman. Strategies of Cooperation: Managing Alliances, Networks, and Joint Ventures. Oxford: Oxford University Press, 2005.
  • Wallace, Robert L. Strategic Partnerships: An Entrepreneur's Guide to Joint Ventures and Alliances. New York: Kaplan Publishing, 2004.

Articles:

  • Bamford, James, David Ernst, and David G. Fubini. “Launching a world-class joint venture.” Harvard Business Review (February 2004): 90–100. Online at: hbr.harvardbusiness.org/2004/02/launching-a-world-class-joint-venture/ar/1
  • Perkins, Susan, Randall Morck, and Bernard Yeung. “Innocents abroad: The hazards of international joint ventures with pyramidal group firms.” NBER Working Paper 13914 (April 2008). Online at: www.nber.org/papers/w13914
  • Steensma, H. K., J. Q. Barden, C. Dhanaraj, M. Lyles, and L. Tihanyi. “The evolution and internalization of international joint ventures in a transitioning economy.” Journal of International Business Studies 39:3 (April 2008): 491–507. Online at: dx.doi.org/10.1057/palgrave.jibs.8400341

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