Why joint venture is good

When performance began to falter, the Canadians allowed their British partners to become more involved but did not jump in themselves. When the British failed to rectify the situation, the Canadians approached them directly—not via the joint venture—and argued that they had had their chance and should now let the Canadians run the show. This was done and performance improved. Of course, majority ownership and dominance of a joint venture do not necessarily go hand in hand.

And one parent dominated four other ventures, despite the fact that they were deals. Many companies avoid joint ventures, although they can be managed by one parent if the passive partner agrees. Of course, not all parents of shared management ventures own equal shares, as evidenced by 5 of the 20 shared ventures in this study.

The manager of one successful venture stated that the ownership made little difference to the general manager of a shared management venture. In this particular case, the eight-man board consisted of four executives from the American parent, three from the German parent, and the general manager, who was a former employee of the German company.

The manager made it clear to both parents that, should any issue come to a board vote, he would vote with the German parent executives—even if he disagreed with them—thus creating a four-four deadlock. In other words, all issues would have to be negotiated. Yet in 14 years of his administration, no issue has ever been put to the board for a formal vote. Naturally, joint ventures that draw functional managers from both parents are more difficult to manage than those that do not.

Managers of international joint ventures may not only have communication problems because of language barriers; they may also have different attitudes toward time, the importance of job performance, material wealth, and the desirability of change.

Particularly troublesome are programs between partners from developed and developing countries. For example, an American-Iranian venture one of only two in the study between the developed and developing worlds did have problems until a new general manager sent most of the Americans back home.

They could not adapt to dealing with a work force that had, on average, a grade three education. The Americans were replaced with Iranians who were first sent for short training periods with the U. Performance improved considerably. Of course, such differences can delay the creation of an effective, cohesive management team.

The president of one Canadian venture with functional managers from three companies supported this notion:. In one division, I discovered I had insulted a senior manager by going directly to a subordinate to get some information. In his previous company, the hierarchy was very strictly observed, and if you wanted information you asked at the top and the request was relayed down until someone could answer. Then the answer came all the way back up.

Employees of another division are disgruntled with the bureaucracy they find here. They are used to a small, entrepreneurial organization. What we regard as the facts of life, like the time taken to get an approval, they look at with surprise and dismay. In one way, these links will be valuable assets by easing the transmission of technical and other information from the parents to the venture; but on the other hand, they can force a functional manager to pay more attention to the events in and signals coming from the parent company than in the joint venture.

One West Coast manager summarized the problem of trying to create a cohesive management team in such a situation:. The people who work for you are not necessarily appointed by you, so your hiring, firing, and promotion powers are limited. In spite of the comments so far, joint ventures that had managers from both parents performed neither better nor worse than those that did not.

Four out of the eight shared management ventures in this study that did not use executives from both parents were successful, compared with six out of the eleven that did—not a significant difference. One of the dominant parent ventures had a general manager from the passive parent.

Apparently, the foreign dominant parent wanted to curry favor with the local government. Partly as a result of this unusual staffing decision, the venture became one of only two dominant parent ventures in this study that failed. The general manager explained the impotence he felt:.

We made most of our purchases from [the dominant parent] at a price fixed by them, and we sold nearly all our output to them, again at their price. Product mix, and even the production schedule, was beyond my control. My number two man reported to his superiors in Germany every day; but because of the language problem, I never knew exactly what was being discussed.

Because of the difference in parent pay scales, he was being paid even more than I was. Having managers from only one parent in a venture can lead to frustrations for the managers as well as parent company executives. One venture manager blamed the demise of his venture on the fact that the technology-supplying U. Delays caused by explanations via telex, telephone, and letters to the British that their technology needed modification enabled the competition to enter the market first and ultimately prevented the venture from obtaining the market share it needed for survival.

Clearly, there are both pros and cons to using functional executives from both parents in a shared management joint venture. Research suggests no right or wrong staffing choice.

But if a venture falls on hard times, mixed staffing may add to its problems. One European venture provides a dramatic example of the disintegration that can set in. The American and European parent companies had each supplied the venture with two functional managers, and the Europeans had also supplied its general manager. An American in the U. He was competent and tried to represent each side fairly; but when it came right down to it, there was no question about where his loyalties lay.

As things got tough in the market, they started to make changes in the venture that we did not approve, and our functional managers reported them to us. The problem was that our managers were not supposed to be communicating directly with us; our information was supposed to come from the general manager. As a result, our manager who had given us the information was cut off by the others, and we got nothing more. Over time, the split between the managers from the two companies grew, and the place practically became an armed camp.

Joint ventures do tend to have a relatively high failure rate. Nonetheless, they also enjoy a number of specific advantages. Advantages of joint ventures Joint ventures enable companies to share technology and complementary IP assets for the production and delivery of innovative goods and services.

This can be especially true in attractive markets, where local contacts, access to distribution, and political requirements may make a joint venture the preferred or even legally required solution.

Joint ventures may provide specialist knowledge of local markets, entry to required channels of distribution, and access to supplies of raw materials, government contracts and local production facilities. In a growing number of countries, joint ventures with host governments have become increasingly important.

These may be formed directly with State-owned enterprises or directed toward national champions. There has been growth in the creation of temporary consortium companies and alliances, to undertake particular projects that are considered to be too large for individual companies to handle alone e. Exchange controls may prevent a company from exporting capital and thus make the funding of new overseas subsidiaries difficult.

The supply of know-how may therefore be used to enable a company to obtain an equity stake in a joint venture, where the local partner may have access to the required funds. It also affects your liability if the venture goes wrong. You need a clear legal agreement setting out how the joint venture will work and how any income will be shared.

See the page in this guide on how to create a joint venture agreement. Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects. A joint venture can also be very flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting the commitment for both parties and the business' exposure.

Joint ventures are especially popular with businesses in the transport and travel industries that operate in different countries.

Partnering with another business can be complex. It takes time and effort to build the right relationship. Problems are likely to arise if:.

Success in a joint venture depends on thorough research and analysis of aims and objectives. This should be followed up with effective communication of the business plan to everyone involved. Setting up a joint venture can represent a major change to your business. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy. It's important to review your business strategy before committing to a joint venture.

This should help you define what you can realistically expect. In fact, you might decide that there are better ways to achieve your business aims. See our guide on how to assess your options for growth. You may also want to look at what other businesses are doing, particularly those that operate in similar markets to yours. Seeing how they use joint ventures could help you choose the best approach for your business. At the same time, you could try to identify the skills they apply to partner successfully.

You can benefit from examining your own business. Be realistic about your strengths and weaknesses - consider performing a SWOT strengths, weaknesses, opportunities and threats analysis to discover whether the two businesses are a good fit. You will almost certainly want to find a joint venture partner that complements your own business' strengths and weaknesses. You should take into account your employees' attitudes and bear in mind that people can feel threatened by a joint venture.

It can also be difficult to build effective working relationships if your partner has a different way of doing things. If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits.

Joint ventures often enable growth without having to borrow funds or look for outside investors. You may also be able to use your joint venture partner's customer database to market your product, or offer your partner's services and products to your existing customers. Joint venture partners also benefit from being able to join forces in purchasing, research and development.

Before starting a joint venture, the parties involved need to understand what they each want from the relationship. Smaller businesses often want to access a larger partner's resources, such as a strong distribution network, specialist employees and financial resources.

The larger business might benefit from working with a more flexible, innovative partner, or simply from access to new products or intellectual property.

Similarly, you might decide to build a stronger relationship with a supplier. You might benefit from their knowledge of new technologies and get a better quality of service. The supplier's aim might be to strengthen their business from a guaranteed volume of sales to you. The objectives on which you agree should be turned into a working relationship that encourages teamwork and trust.

See the page in this guide on how to make your joint venture relationship work. The ideal partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organisations.

A good starting place is to assess the suitability of existing customers and suppliers with whom you already have a long-term relationship. You could also think about your competitors or other professional associates. Broadly, you need to consider the following:. If you opt to assess a new potential partner , you need to carry out some basic checks:.