Joint Venture

A Joint Venture is the most common method for companies to enter into new markets. Two or more businesses come together and combine their commercial resources. Most businesses across the world are using this strategy to combine their diverse expertise and resources, minimize business costs, and share the risks involved. This partnership is a driving force of the modern business strategy. Many businesses use this strategy to expand beyond their core business. The article elaborates below an overview of joint ventures, their significance in the business world, different types of ventures, their advantages, and the challenges/risks involved in them.

Definition

A Joint Venture is a partnership of two or more businesses where they combine their resources to complete a particular task. This task can be either a business activity or a project. Each player of the JV is responsible for the costs, profit, and loss associated with the venture. However, the venture is seen as an entity of its own and is a separate form from the interest of the parties involved.

The main purpose of joint ventures is to combine with local businesses to enter into the new market. These ventures can be made up of any form of legal structure. It can employ any structure like partnerships, limited liability companies (LLC), corporations, or any other type of business entity.

Ventures of this type will make agreements among the members to cover the business’s operational activities like the board of directors, management structures, capital and equity management, legality, and financial rights. They even decide upon the market rights of each partner in different regions of the business structure and resolution of disputes.

One of the main advantages incurred by the formation of combined ventures is the share of expertise, resources, and investment returns and even the risk factors and loss in the business. Companies can expand their business beyond their main operational activities, explore new markets, and expand their portfolio/brand.

Established companies can make use of these partnerships to enhance their market presence, credibility, and trust in the newly formed venture. It will also help in attracting investors, customers, and other stakeholders into the venture.

Types of Joint Ventures

Function-Based Ventures

As the name indicates, the businesses join together as a venture to perform a particular function. These business-related functions can be like sales, distribution, or marketing. This combination of businesses will empower the utilization of each other’s resources, networks, and expertise in particular business areas. This will in turn result in the improvement of efficiency and market penetration.

These ventures might be ongoing as per the continuous business functions. The individual companies can also choose to create a separate business legal entity and can operate with a formal agreement based on their objectives and requirements.

An example of a function-based venture is the North American Coffee Partnership (NACP), which was formed by the combination of multinational companies PepsiCo and Starbucks. It has resulted in their improved brand awareness, profits, and market reach.

Project-Based Ventures

This type of JV is formed for performing a specific business project. It is time-bound and will have an agreement between the companies to finish the project in a specific amount of time. Like other venture types, they also pool their expertise, abilities, and resources to reach the project objectives and goals. It will help them finish the project or reach the goal much faster and more efficiently than they will be able to finish if done independently.

After the completion of the specific project, this venture can be terminated and each company can get back to their businesses. If the project is completed successfully, then there will be a scope for future collaborations for some other projects.

While partnering they will form a contractual agreement, legal entity, or informal collaboration between them.

The partnership of British Petroleum (BP) and Reliance Industries was made for the specific purpose of developing offshore gas and oil reserves in India. They combined the Reliance industry’s market expertise and BP’s technical/operational expertise to achieve their specific goal.

Vertical Venture

This venture is established mainly between the suppliers and buyers. Some companies form a strategic collaboration during the various stages of their supply chain. This collaboration can be between distributors, retailers, or manufacturers. It will enhance the economic scalability, optimize the supply chain, better control over the production/distribution process, increase efficiency, and reduce the inhibited costs for both of them.

It required proper coordination between the companies to identify their flaws and improve operations and information flows. This venture will also improve the quality of products by ensuring that they meet the regulatory standards, specifications, and customer requirements. If a company can work along with the supply chain companies, then they can enhance their delivery timings and inventory levels.

A venture named Raizen was formed by the companies Royal Dutch Shell and Cosan to focus on competitive and sustainable fuels. Raizen has become a well-established bioenergy producer in Brazil.

Another vertical joint venture is the combination of Honda and LG Energy Solutions, which was formed to established to build a battery plant in Ohio. Their work is that the plant will use the LG Energy Solution’s battery modules to create batteries for Honda’s electric vehicles.

Horizontal Venture

Horizontal ventures are formed between companies working in the same line of business that are often each other’s competitors. The purpose of combining is to pool the resources and gain competitive advantages. They will also work together to achieve a shared objective, create innovative products, or expand into new markets.

This type of venture will also manage the mitigation of risks related to competition, industry-specific challenges, and market fluctuations/downturns.

A famous horizontal venture is Hulu, which is a combined venture by several media companies like News Corporation, Providence Equity Partners, NBC Universal, and The Walt Disney Company. By pooling their resources like media libraries, they were able to develop a streaming platform for online video content. This venture gave them advantages for monetizing their content libraries, sharing costs and risks, better positioning in the market, adapting to the new media landscape, cross-promotion of their brands, and opportunities for future growth.

The Advantages of a Joint Venture

There are significant advantages to forming a JV. Some of the major advantages are explained below:

Resource Pooling

These types of ventures enjoy the advantage of pooling their resources to achieve a combined goal. For example, one company might have advanced and better distribution channels, while the other may have the best manufacturing process and technology in hand. Both of these companies can combine their valued resources and achieve a specialized objective very easily.

Cost Reduction

Each company in the combined venture will share its initial capital investment in the particular project. They can also share the expenses and reduce the operational costs. This is most useful for those companies who share the advanced technologies that may be costly to own and implement independently. The reduction of cost can be enhanced if they share costs for advertising, labor costs, and business supply.

Combining Expertise

Each company and its professionals will have different levels of expertise, skill sets, backgrounds, and knowledge. Both companies can take advantage of each other’s expertise and benefit from each other to move towards the specific venture objective.

Entering into New Markets

Another main benefit of combining businesses to form a venture is the easy penetration into the new market/industry. Companies can expand their product/service portfolio and increase their market share. Companies can partner with local businesses to enter a new market area and expand their presence over there.

In this scenario, all the legal regulations and channels will be taken care of by the existing local company. For example, a company that wants to enter into a new market is sharing a venture with a local business, can benefit from the already existing distribution and logistics channels of the local company and thereby supply their products in the new market.

Reduced Risks

Since there will be a mutual agreement between the joined companies to share the business-related losses, their financial loss or financial risks will be minimized. Each other’s expertise in the new market, knowledge, and connection networks in the industry will also help to mitigate the potential risks in the venture.

Credibility Enhancement

This venture is very beneficial for small companies that find it difficult and take a long time to create enhanced credibility among potential investors, customers, and other stakeholders. By combining into a partnership with well-established, well-known branded, larger, and reputed companies, they will also enjoy the credibility and integrity associated with them. It will also help them to enhance their market visibility more effectively and quickly.

Risks and Challenges Included in Joint Venture

Even though they enjoy lots of benefits and advantages, there are several risks and challenges associated with the formation of a joint venture. The formation itself is very complex since a lot of time and effort needs to be put in.

Cultural Mismatches – Different companies follow different cultures and diversified management practices. Combining these differences may pose a problem. This can also lead to misunderstandings, conflicts, miscommunications, poor cooperation, and integration which will affect the venture’s objective and its success rate. Some advanced solutions to mitigate this potential challenge are encouraging cultural training, open communications, mediators (cultural advisors), or even forming a venture by combining businesses from the same culture.

Different Objectives – Companies entering into these types of ventures may have different objectives and goals to achieve. Also, pursuing different objectives will threaten the success of the venture. It is very important to work together towards a common goal to reach success. To face this challenge, the venture together can prepare an arrangement where the objectives are clearly defined and communicated to all the participants involved. Imbalanced Contributions – The expertise, assets, resources, and investments put by the companies involved in the venture may differ. These differences might lead to future disputes and inequality tensions among them and will in turn affect the success ratio of the venture. Some of the better-off solutions to mitigate this challenge are creating a transparent agreement, mutual agreement on fair compensation, and performing regular audits of the functioning of the venture.

Issues on Exit Strategies – Disagreements on the exit strategies are common risks in these types of ventures. It may cause severe disputes and legal matters between the companies, particularly when the venture is unsuccessful. Some solutions are the preparation and agreement of a predefined exit strategy, implementation of valuation methods (for assets and revenue), continuous performance monitoring, and revisiting of the exit strategy.

Conclusion

The process of combining two or more businesses to form a joint venture is a powerful strategic tool for the types of businesses that are looking forward to expanding their activities into new horizons. They can also combine their business resources and even share the risks inhibited in the venture. The key point is to have a clear understanding, planning, agreements, and efficient management strategies to attain success with this venture. With an appropriate understanding of the key aspects and benefits of these ventures, businesses can formulate diverse strategies to achieve their business goals and objectives and maintain sustainable growth.