Despite the reported high ‘failure’ rate of international joint ventures (IJVs) why are they still frequently used by companies to expand their international presence? What can a company do to reduce the likelihood of failure? Use examples throughout.
Every business seeks to expand and have capabilities that will enable it to buy or sell properties, services or products globally. Aljawi, (2009) argues that a global joint venture refers to joining of at least two companies from different countries to facilitate resources exchange and risk sharing. The joint venture doesn’t seem to be a successful method of a company venturing into new markets due to the previous failures of companies that have tried do (Soulsby & Clark, 2011). However, these failures have not prevented other businesses from using the joint venture method to expand internationally. This research paper will be looking at the various reasons why businesses still use the international joint venture and the strategies to manage associated risks to ensure the joint enterprise will be successful.
Reasons for International Joint Venture
The first reason why organizations join is to share responsibilities and resources. In most cases, a company opts for the joint venture because it does not have adequate technology, capital, link to a particular market or knowledge that is required to successfully handle a project independently. When the companies come together each of them gives the other access to its resources without having to spend extra capital to purchase the resources (Stewart & Maughn, 2011). For example, organization Z technology and facilities of production that organization Y requires to manufacture and distribute a new commodity. There is a mutual benefit of the two organizations since Y will have gain access to the necessary production equipment without buying them while Z will manufacture a product that it didn’t spend to develop. None of the company will be left to handle the task on its own, it’s combined effort.
The companies involved in the joint venture will enjoy some kind of flexibility (Dhir, 2017). The global joint venture is not like a merger or acquisition; it is a contract which is temporary between the involved parties. The contract will be terminated on a future date that has been agreed on or upon the project completion. There are also creative ways that can be used by the companies to get exit the joint venture. Unlike other permanent strategies, the joint venture does not require the creation of a new entity under which the project will be handled. Also, the involved parties will not be controlled or managed by the other nor will they need to terminate their business operations during the time of the joint venture. Each organization keeps its unique identity and have the liberty to return to their business norms once the global joint venture has ended.
Joint venture gives the advantage of sharing risk; the risk is distributed among the involved organizations (Idris, & Seng Tey, 2011). New service delivery or new product creation is associated with great business risk and most of the companies are usually not in a position to handle the risk independently. The required resources are distributed among the companies and therefore completing the project becomes easy (Ozorhon et al., 2010). The chances of the project failing or having lower returns are minimal since the participating organizations made their contributions fully. For example, a joint venture of three companies where risk is shared equally will require each organization to contribute $20 million in a project that costs $60 million. It is also a great way of saving money among other resources. In the above example, each company will save $40 million since it will not be wholly responsible for the entire cost of the project. Any losses will also be shared among the participating organizations.
Businesses are able to evade to competition barriers. One of the major reasons for creating a joint venture is to reduce the pressure of product pricing and high competition level. Through the joint venture, sometimes the businesses are able to evade the competitor barriers that create market penetration difficulties (Devlin & Jacobs, 2011). There are high chances that the business will succeed as one is in business with a brand that is well established. Assume one is marketing a product like kids toys through a renowned organization. There is a high probability that the product will sell more since there will be no challenges in the product pricing and the company already has a competitive advantage. The organization has the opportunity to develop more deals during the venture period (Elo, 2009). Higher momentum to run the business and more partners will be made.
The global joint venture is an easy way to access new networks of distribution and new markets (Stewart & Maughn, 2011). Once a joint venture is created, it means that the involved companies will share customers and distribution channel for that particular product. In most cases, neither company is interested in the core project; the main aim is to have a link to a new market (Klossek, 2007). One of the companies may also interested in having a majority share in the venture thus taking control over the project. The local company will benefit since it will give its customers a new product or services thus increasing customers flow and profitability. On the other hand, the foreign company will have penetrated into a new market without much struggle. Advertising and marketing will be easy as well as the local organization is renowned, no much efforts and resources will be required (Ahmed & Ahmed, 2013). A lot of time is saved as research on the new market and distributions is not necessary.
An organization that is looking to increase its efficiency and effectiveness will go into a joint venture (Fang & Zou, 2009). The availability of experienced staff, better technology, and adequate resources will create smooth business operations and increase productivity. Each organization that is involved brings professionals and expertise which assists the joint venture to be competent and aggressive towards achieving the main objectives and goals. The extensive channels of distribution will be extra sources of revenue for the smaller organization. A business that is growing takes time to establish a good consumer base and credibility in the market. Such companies can be assisted by large firms to attain better market credibility faster. All the companies in the joint venture will attain economies of scale; this is where they will have a cost advantage due to the increased level of output (Hawkins, 2010). It is a win-win for all the involved parties.
Joint venture creates access to better resources such as more capital, better technology, and staff that is specialized (Ahmed & Ahmed, 2013). A small business would go into a joint venture with a more powerful organization because it does not have what is required to successfully complete a particular project. Once the joint venture is created, the small business will enjoy the financial ability of the other company to make huge investments. It will have most of the resources readily available to complete whichever project they need. Large organizations have well-trained staff members who have great exposure and experience to handle different tasks. Therefore, it is a great opportunity for the staff to learn from one another without being charged. They also have the most advanced technology to run the day to day activities thus completing the project will be easy. It’s also a chance to learn how such technology works.
Reducing the Joint Venture Failure
The joint venture has risen to become one of the quickest and most preferred methods to facilitate business growth expansion. However, it’s not that easy; there are numerous risks associated with this method. Few businesses last long enough to get to enjoy the real benefits of the joint venture. To make sure that the joint venture is successful, the following are some of the strategies to reduce the associated risks. It critical to creating a common goal, purpose, and objectives that are well understood by the involved parties (Park, 2010). This will ensure that the parties are on the same page right from when the joint venture is formed. This means that the companies will have to be clear on reasons for the joint venture and their target achievements at the end of the venture. If the objects are set up front, the joint venture is not likely to encounter unforeseen challenges or failure to meet some of the expectations. For example, a joint venture that has clear goals ensures that the staff is well aware of what is expected of them and therefore all operations will be directed towards achieving the common goal. It also allows early planning to ensure the joint venture will be successful at the end. The resources will be directed towards the main agenda and avoid any distractions along the way.
The other involves the employment of the right leadership to see through the joint venture to the end. Most the organizations neglect the importance of proper leadership when creating the joint venture which at some point will leave the enterprise to flounder. A system of leadership that will ensure the accountability of all organizations and guides the entity towards success should be created (Adnan et al., 2011). The employees also need to be informed about the leadership so that they are aware of who they are answerable to when working for the joint venture. Leaders are seen as the company’s image and therefore the leadership style will be directly associated with the entire organization. For example, leaders who are hardworking and punctual to report will influence the staff to adopt a similar culture. If they are goal oriented so will the employees be? Therefore, leadership should be a key factor to consider while going into a joint venture (Datta et al., 2009).
The joint venture requires all the involved parties to contribute. The risk of failure is greatly reduced when all the parties have equal input in the contract this requires that each party should present its set of specialists and resources to the joint venture to make sure all the operations are kept in order. The joint venture is likely to last longer when all the parties bring something to the table. Imagine a scenario where one company has contributed almost everything to the joint venture, the other company will be less concerned since it doesn’t have much to lose. To avoid a scenario where one company is feeling used by the other which may lead to failure, make sure that they all have equal input. Equal input ensures that every participant is working hard to accomplish the goal and avoid losses. It would also be hard for any of them to exit the joint venture before the due date or before it’s over.
The other is to conduct due diligence on the partner in the joint venture as well as the business. Due diligence that is comprehensive facilitates assessment and evaluation of the other parties whether they have good governance and ethical background (Nahata et al., 2014). It also helps in determining whether the other parties are capable of delivering their part in the joint venture. It would be ignorant to get into business with a party one knows nothing about. For instance, a company that has conducted extensive due diligence has high chances of entering into a joint venture with the right partner, sharing common goals and can work together to achieve the project goals. Otherwise, they would end combining business that does not rhyme at all and therefore, high probability of failure. The only thing that can propel a joint venture towards success is shared values, aligned interests, and trustworthiness among the parties that are involved.
Proper communication channel could go a long way to prevent the failure of a joint venture. Once the joint venture has been initiated, communication among the parties involved is key (Fang & Zou, 2009). A communication channel that ensures every party will be listened to should be established. It will also facilitate the airing of grievances and challenges to the relevant persons so as to prevent them from occurring in the future. The risk is minimized in the joint venture by allowing the participants to raise obstacles and concerns as soon as they are encountered. Proper communication will propel the joint venture in the right direction. Attending to the joint venture regularly raises the probability of its success. Communicate to all the parties that are involved in their roles and responsibilities so that they are fully aware of what is expected of them. The top management will able to know how the venture is fairing by engaging the staff in talks.
An international joint venture requires a comprehensive contract that ensures the interest of the involved companies are protected and gives an alternative in case the interest of one party are not met fully (Girmscheid & Brockmann, 2009). Most of the joint ventures fail because there is a lack of accountability among the different parties. A contract ensures that each party will have sizable returns without any of them feeling used up by the other. All the parties are expected to sign the agreement to show that they are in agreement with the terms and conditions set in the contract. For example, a joint venture that has a well-drafted contract upfront has higher chances of succeeding it will reduce conflicts among the partners. It also ensures that each party gets its fair share and none is taking advantage of the other. Lack of a contract means there is no accountability for all the parties and therefore the joint ventured is bowed to fail.
Building trust such that information such as financial status is shared openly is paramount for the joint venture success (Ertug et al., 2013). Trust prevents any suspicions among the involved parties. A higher level of trust increases the chances of good relationship (Adnan et al., 2011). Also, develop performance indicators that let you know how the business is doing and signals potential challenges. It is important for all the parties to know what they want to achieve and have the same objectives. Regular evaluation of the business performance will tell whether the entity is moving upwards or downward. In case the performance is not good, the management will have the chance to correct any mistakes and solve any challenges that might be deterring success. Have frequent evaluation to determine how the business operations could be enhanced so as to meet the set goals and objectives.
Having a strategic plan should be the first step of every joint venture. Before proceeding to the joint venture, do a thorough evaluation of the company strategy to make sure that the joint venture is the most appropriate strategy to achieve the company goals. Weakness and strengths analysis are necessary to determine whether the other parties are a perfect match. Proper planning identifies the best way ways to attain joint venture objectives (Killing, 2014). It will also help the management understand the main factors that are affecting the business as well as the risks. A plan will contain strategies of how to minimize the risks or handle these challenges once they arise in the process. It will ensure the entity will maximumly use any business opportunity. Every operation runs smoothly and efficiently when planning is done in advance since everything has been put in order. With a proper plan, there will be no wastage of time and resources.
Despite the reported ‘failure’ of joint venture, there are various reasons why businesses still use this method. Besides sharing of resources, risks and responsibilities, joint ventures gives businesses some kind of flexibility. Through joint venture, businesses are able to evade competition. In addition to giving access to new markets, distribution channels and better resources, it also increases the entity effectiveness and efficiency. The probability of joint venture failure can be reduced by utilizing the following strategies. Having common goals and the right leadership system that will lead the entity towards achieving the goals. Before going into the joint venture, perform due diligence to ensure one has the perfect match for the partnership. Proper communication channel is key in ensuring the staff is fully aware of what is expected of them.