Joint Venture & Strategic Alliance

Joint Venture

Introduction
A joint venture (often abbreviated JV) is an entity formed between two or more parties to undertake economic activity together.
The parties agree to create a new entity by both contributing equity, and they then share in the revenues, expenses, and control of the enterprise. The venture can be for one specific project only, or a continuing business relationship such as the Sony Ericsson joint venture.
This is in contrast to a strategic alliance, which involves no equity stake by the participants, and is a much less rigid arrangement.
The phrase generally refers to the purpose of the entity and not to a type of entity.
Therefore, a joint venture may be a corporation, limited liability company, partnership or other legal structure, depending on a number of considerations such as tax and tort liability.

Joint ventures are common in the oil and gas industry, and are often cooperations between a local and foreign company (about 3/4 are international). A joint venture is often seen as a very viable business alternative in this sector, as the companies can complement their skill sets while it offers the foreign company a geographic presence.

It is also known that joint ventures in low-developed countries show a greater instability, and that JVs involving government partners have higher incidence of failure (private firms seem to be better equipped to supply key skills, marketing networks etc.) Furthermore, JVs have shown to fail miserably under highly volatile demand and rapid changes in product technology.^{[citation needed]}
India, require foreign companies to form joint ventures with domestic firms in order to enter a market. This requirement often forces technology transfers and managerial control to the domestic partner.
Internal reasons

1. Build on company's strengths
2. Spreading costs and risks
3. Improving access to financial resources
4. Economies of scale and advantages of size
5. Access to new technologies and customers
6. Access to innovative managerial practices

Competitive goals

1. Influencing structural evolution of the industry
2. Pre-empting competition
3. Defensive response to blurring industry boundaries
4. Creation of stronger competitive units
5. Speed to market
6. Improved agility

Strategic goals

1. Synergies
2. Transfer of technology/skills
3. Diversification

The most famous JV today which is also a success story is Mittal- Arcelor another is TATA- Corus.

Types of joint ventures.

Three most common types of joint venture companies may be described as follows-

[a] Two parties, who/which may be individuals or companies, one of them non resident or both residents , incorporate a company in India. Business of one party is transferred to the company and as consideration for such transfer, shares are issued by the company and subscribed by that party. The other party subscribes for the shares in cash.

[B] Alternately, the above two parties subscribe to the shares of the joint venture company in agreed proportion, in cash, and start a new business.

[C] Promoter shareholder of an existing Indian company and a third party, who/which may be individual/company, one of them non-resident or both residents, collaborate to jointly carry on the business of that company and its shares are taken by the said third party through payment in cash.
A joint venture is a strategic alliance where two or more people or companies agree to contribute goods, services and/or capital to a common commercial enterprise.

Sounds like a partnership, doesn’t it? But legally, joint ventures and partnerships are not the same thing.

Joint Ventures versus Partnerships

The main difference between a joint venture and a partnership is that the members of a joint venture have teamed together for a particular purpose or project, while the members of a partnership have joined together to run "a business in common".

Each member of the joint venture retains ownership of his or her property.

And each member of the joint venture shares only the expenses of the particular project or venture.

Advantages of international joint ventures:
International joint ventures can be extremely advantageous for all partners since they provide participation to income and growth. Developing countries give joint ventures preferential treatment because they present the desired mix of foreign technological and capital involvement, they guarantee local management, and effect an efficient transfer of technology.

Advantages of JV's for the international investing company:	Advantages of JV's for the host country and corporation:
1) Chance to penetrate a new market 2) Chance to sell technology, processes, equipment, consulting services, etc. 3) Chance to invest capital and get return streams for many years 4) Take advantage of the expertise in the local market of the host country company 5) Chance for growth	1) Chance to gain up-to-date technological and managerial know-how 2) Chance to create new industries, skills, training, etc. 3) Chance for increased employment 4) Chance to get important return streams for many years 5) Chance for growth

An important commercial reason for participating in JV's is to minimize the risk of exposing long-term investment capital while at the same time maximizing leverage on the capital that is invested. In minimizing the risk, the partners in a JV must understand that economic and political conditions in many countries are volatile. Due to this, corporations tend to shorten their investment planning time span more and more by expecting higher return in the early years of the investment. The financial rationale therefore takes greater importance.

Drawbacks of JV's for the international investing company:	Drawbacks of JV's for the host country and corporation:
1) Rapid change in the host country political or economic situation can create substantial losses for the investing corporation 2) Differences in culture and management style can create problems between the partners over settlement of claims, valuation of assets and liabilities, etc. 3) Adverse publicity in local and international media can damage the image and reputation of a company.	1) If the host country is perceived as a difficult marketplace, foreign investors may avoid doing business there. 2) The international partner might not deliver on all the promises made.

The percentage ownership is extremely important, since it establishes which of the partners has the leadership role in a JV. That's why, in many international JV's, American firms insist to have at least 51% ownership, in order to control the Board of Directors (BOD) and the JV management. Of course this is a very political issue, and in many developing countries a foreign investor can own maximum 49% of a JV.
Advantages & Disadvantage of a Joint Venture
 
There are many good business and accounting reasons to participate in a Joint Venture (often shortened JV). Partnering with a business that has complementary abilities and resources, such as finance, distribution channels, or technology, makes good sense. These are just some of the reasons partnerships formed by joint venture are becoming increasingly popular.
A joint venture is a strategic alliance between two or more individuals or entities to engage in a specific project or undertaking. Partnerships and joint ventures can be similar but in fact can have significantly different implications for those involved. A partnership usually involves a continuing, long-term business relationship, whereas a joint venture is based on a single business project.
Parties enter Joint Ventures to gain individual benefits, usually a share of the project objective. This may be to develop a product or intellectual property rather than joint or collective profits, as is the case with a general or limited partnership.
A joint venture, like a general partnership is not a separate legal entity. Revenues, expenses and asset ownership usually flow through the joint venture to the participants, since the joint venture itself has no legal status. Once the Joint venture has met it’s goals the entity ceases to exist.
What are the Advantages of forming a Joint Venture?

§  Provide companies with the opportunity to gain new capacity and expertise

§  Allow companies to enter related businesses or new geographic markets or gain new technological knowledge

§  access to greater resources, including specialised staff and technology

§  sharing of risks with a venture partner

§  Joint ventures can be flexible. For example, a joint venture can have a limited life span and only cover part of what you do, thus limiting both your commitment and the business' exposure.

§  In the era of divestiture and consolidation, JV’s offer a creative way for companies to exit from non-core businesses.

§  Companies can gradually separate a business from the rest of the organisation, and eventually, sell it to the other parent company. Roughly 80% of all joint ventures end in a sale by one partner to the other.

The Disadvantages of Joint Ventures

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

§  The objectives of the venture are not 100 per cent clear and communicated to everyone involved.

§  There is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners.

§  Different cultures and management styles result in poor integration and co-operation.

§  The partners don't provide enough leadership and support in the early stages.

§  Success in a joint venture depends on thorough research and analysis of the objectives.

Example:

Here is why: Money is the lifeblood of a free, capitalist society. Joint Ventures offer people who have no savings, little education and no connections or business background, the opportunity to make money quickly and build multiple streams of passive income. Joint Ventures is a tool to create wealth and freedom, to help small businesses survive and flourish, to build strong relationships between good entrepreneurs and allow people to regain their dignity and self respect through the ability to be paid what they’re really worth.

Joint Ventures are a business opportunity in itself – it is the great liberator. Anyone can learn how to use JV’s to create financial independence. Students who finish college and still can’t find a job, seniors who can’t survive on their pensions, immigrants who face xenophobic attitudes in their new countries, good people who are downsized and people whose educational qualifications are no longer deemed sufficient by bureaucrats, can all grab Joint Ventures as a drowning man in a turbulent and dangerous ocean would grab a lifebelt.

Crime, drug dealers and terrorism needs poverty and desperation in order to flourish. By helping people to create their own financial independence through the understanding and application of Joint Ventures, we can save marriages and lives and our society. The only people who claim that money is not important are those who don’t have any. People can make good money with no risk, no overhead and no previous experience or education, and they can do so very fast. Our one day, Joint Venture Broker Bootcamps teach people in one day how to start making money the very next day, with no capital investment, regardless of age or gender. It’s almost miraculous how powerful this concept is. That’s why all the large businesses use them.

Joint Ventures also give us security – we can earn money even if we can’t work through illness or other reasons, because that is the nature of a good JV. This is the solution so many people seek, yet they don’t even know it exists. I want to tell people all over the world that they can create financial freedom through JV’s. With JV’s, we don’t put all our eggs in one basket and we don’t give someone else power over us. We can be independent and proud and free. I love Joint Ventures and I love teaching others about this amazing business tool. I strongly suggest you read the following

Businesses of any size can use joint ventures to strengthen long-term relationships or to collaborate on short-term projects.

A successful joint venture can offer:

·         access to new markets and distribution networks

·         increased capacity

·         sharing of risks and costs with a partner

·         access to greater resources, including specialised staff, technology and finance

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.

The risks of joint ventures

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

·         the objectives of the venture are not 100 per cent clear and communicated to everyone involved

·         the partners have different objectives for the joint venture

·         there is an imbalance in levels of expertise, investment or assets brought into the venture by the different partners

·         different cultures and management styles result in poor integration and co-operation

·         the partners don't provide sufficient leadership and support in the early stages

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.

A joint venture involves two or more businesses pooling their resources and expertise to achieve a particular goal. The risks and rewards of the enterprise are also shared.

The reasons behind forming a joint venture include business expansion, development of new products or moving into new markets, particularly overseas.

Your business may have strong potential for growth and you may have innovative ideas and products. However, a joint venture could give you:

·         more resources

·         greater capacity

·         increased technical expertise

·         access to established markets and distribution channels

Entering into a joint venture is a major decision. This guide provides an overview of the main ways in which you can set up a joint venture, the advantages and disadvantages of doing so, how to assess if you are ready to commit, what to look for in a joint venture partner and how to make it work

Why Joint Ventures?

As there are good business and accounting reasons to create a joint venture (JV) with a company that has complementary capabilities and resources, such as distribution channels, technology, or finance, joint ventures are becoming an increasingly common way for companies to form strategic alliances. In a joint venture, two or more "parent" companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control.

Important Factors to be Considered Before a Joint Venture is Formed

·         screening of prospective partners

·         joint development of a detailed business plan and shortlisting a set of prospective partners based on their contribution to developing a business plan

·         due diligence - checking the credentials of the other party ("trust and verify" - trust the information you receive from from the prospective partner, but it's good business practice to verify the facts through interviews with third parties)

·         development of an exit strategy and terms of dissolution of  the joint venture

·         most appropriate structure (e.g. most joint ventures involving fast growing companies are structured as strategic corporate partnerships)

·         availability of appreciated or depreciated property being contributed to the joint venture; by misunderstanding the significance of appreciated property, companies can fundamentally weaken the economics of the deal for themselves and their partners.

·         special allocations of income, gain, loss or deduction to be made among the partners

·         compensation to the members that provide services

Strategic Alliances

A Strategic Alliance is a formal relationship formed between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organizations.
The alliance is cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

Types of strategic alliances

Various terms have been used to describe forms of strategic partnering. These include ‘international coalitions’ (Porter and Fuller, 1986), ‘strategic networks’ (Jarillo, 1988) and, most commonly, ‘strategic alliances’. Definitions are equally varied. An alliance may be seen as the ‘joining of forces and resources, for a specified or indefinite period, to achieve a common objective’.
According to Yoshino and Rangan^[2] the Internationalisation Strategies can be categorized using the model displayed at the right side.

Stages of Alliance Formation

A typical strategic alliance formation process involves these steps:

• Strategy Development: Strategy development involves studying the alliance’s feasibility, objectives and rationale, focusing on the major issues and challenges and development of resource strategies for production, technology, and people. It requires aligning alliance objectives with the overall corporate strategy.
• Partner Assessment: Partner assessment involves analyzing a potential partner’s strengths and weaknesses, creating strategies for accommodating all partners’ management styles, preparing appropriate partner selection criteria, understanding a partner’s motives for joining the alliance and addressing resource capability gaps that may exist for a partner.
• Contract Negotiation: Contract negotiations involves determining whether all parties have realistic objectives, forming high calibre negotiating teams, defining each partner’s contributions and rewards as well as protect any proprietary information, addressing termination clauses, penalties for poor performance, and highlighting the degree to which arbitration procedures are clearly stated and understood.
• Alliance Operation: Alliance operations involves addressing senior management’s commitment, finding the calibre of resources devoted to the alliance, linking of budgets and resources with strategic priorities, measuring and rewarding alliance performance, and assessing the performance and results of the alliance.
• Alliance Termination: Alliance termination involves winding down the alliance, for instance when its objectives have been met or cannot be met, or when a partner adjusts priorities or re-allocated resources elsewhere.

The advantages of strategic alliance includes 1) allowing each partner to concentrate on activities that best match their capabilities, 2) learning from partners & developing competences that may be more widely exploited elsewhere, 3) adequency a suitability of the resources & competencies of an organization for it to survive.

Why Consider Strategic Alliances?

What motivates a business to explore the option of strategic alliances?  Here is a brief discussion of potential benefits (which must be balanced against risks before making a commitment). 
Note that the deal will not be consumated until and unless the parties perceive the final version of the arrangements to be in their respective best interests.  The parties also need to ensure that their perceptions are based on a complete understanding of each others' obligations, expectations, and teminology.
  Multiply market entry alternatives and available resources for expansion into choice international markets.  Consider possibility of replicating IJV's in different market areas. 
  Access dominant or leading foreign technology through local manufacture in the target market.  Domestic markets may also be served trough reverse licensing from the IJV. 
  Access lucrative but otherwise closed or resistant markets through the efforts of a foreign partner to maximize value of established relationships.  Develop customer service channels what would be unfeasible otherwise. 
  Gain cost advantages through scale and locational economies (factor costs). 
  Employ key managers experienced in cultural norms and business practices of overseas target markets. 
  Realize political or legal advantages via relationship with a partner enjoying regional or national recognition.
  Exploit multiple synergies in production, marketing, and finance. 
  Limit exposure of own corporate assets to those actually contributed to the joint venture. 

Creative Strategic Alliances Examples

• The travel agency and the luggage store.  Both companies look for people who travel. The luggage store was happy to include the agent's information when they sold a piece of luggage and the agent provided luggage tags to her clients when they booked a trip. Both companies benefited from the alliance and their customers received an additional value added service.
• The real estate agent and the pizzeria.  When a client was moving in to their new home, the agent had a pizza delivered, with a magnet congratulating the client on the move. The magnet included the pizza shop number and the agent's contact information. The pizza shop was introduced to the new resident, the agent was cemented in the mind of the customer and the customer didn't have to worry about what to fix for dinner during the move.  (A special incentive:  the agent was able to negotiate a reduced rate on the pizzas he purchased!)