Joint venture: Advantages and disadvantages

Joint Venture: Advantages and Disadvantages

A joint venture is a business entity or an arrangement and a business strategy created and pursued by two or more parties through the combination of resources and capabilities to accomplish shared goals and objectives. Take note that different jurisdictions have different scope and requirements in legally structuring a joint venture. However, virtually all joint ventures are characterized by shared ownership, shared risks and returns, and shared governance.

Pros: The Benefits or Advantages of a Joint Venture

The advantages of a joint venture coincide in one of the four primary reasons for pursuing such an arrangement. These are accessing a new or emerging market through an entry strategy, gaining scale efficiencies through the combination of resources and capabilities, sharing risks for critical investments or projects, or accessing skills and expertise.

From the reasons mentioned above, a joint venture is also an entry strategy or a mode of foreign entry, a strategy to expand a business or opportunities for profitability, an instrument for mitigating risks, and an endeavor for expanding business capabilities.

The fact that a joint venture entails the combination of resources and capabilities, as well as the sharing of skills and expertise, results in advantages for product development through research and development, marketing and distribution activities, and supply chain efficiency.

Note that McDonald’s Corporation has pursued joint ventures with entities in India and China not only to expand its global market reach but also to gain local market insights. Japan-based Sony Corporation and Sweden-based Ericsson formed Sony Ericsson in 2001 to manufacture mobile phones.

In the hydrocarbon industry, oil and gas companies have been pursuing similar arrangements under specific oil and gas agreements with national oil and gas companies or government to explore and produce hydrocarbon resources.

Another advantage of a joint venture is that it is flexible. In some cases, joint ventures are structured as a limited liability company, a partnership such as general partnership or a limited liability partnership, or a corporation. However, there also cases when the venture is simply an arrangement between two or more parties intended to pursue a temporary business task such as a project.

Joint ventures with a limited lifespan have more specific benefits to include limitation of commitment for all involved parties, reduced exposure to risks and other externalities, and options to pursue or terminate the arrangement. Note that there are joint ventures that end in a sale by one partner to another.

Cons: The Risks and Disadvantages of a Joint Venture

The risks and disadvantages of a joint venture revolve around the fact that it takes time to build a stable and mutually beneficial relationship between two or more parties and that partnering with another entity has inherent challenges.

Problems emerge if the goals and objectives of the venture are not 100 percent clear and communicated to all involved parties or if there is an imbalance between the degree of resources and capabilities shared by them. Note that the resources and capabilities of one party should match or complement the resources and capabilities of another party.

Competing interests can also serve as risks of a joint venture. The parties may disagree on running the venture due to their different values and management styles. In directing the venture to the goals and objectives, the parties may disagree on what approach to utilize due to different ways they forecast trends in an industry or market.

There is also the problem arising from cultural conflicts. Note that conflicts emerge when two different cultures meet and fight for dominance. The cultural nuisances of an organization and its people may result in misunderstandings with other organizations and people with different cultural backgrounds, thus resulting in poor integration.

A notable example of a failed joint venture is the venture between McDonald’s Corporation and the India-based Connaught Plaza Restaurants Private Limited. The American company has accused the head of the Indian company of financial irregularities, thus ending in a legal battle intended to take substantial control over the venture. The failed relationship resulted in the closure of over a hundred outlets in northern and eastern India.

Sony and Ericsson ended their joint venture in 2011 because of the changing trends in the mobile phone markets prompted by the emerging popularity of smartphones. Ericsson simply does not have the technological capabilities or inputs suited to the goals and objectives of Sony to compete in the smartphone market.

Nevertheless, the best way to mitigate the risks and manage the disadvantages of a joint venture is through proper research and analysis of goals and objectives, as well as through a well-written joint venture agreement that outlines and explains the roles and responsibilities of involved parties. However, even with proper preparations, joint ventures can still fail due to the evolving needs of involved parties and the direction of an industry or market.