More than 15
years back, there was an important piece published in Harvard Business Review
about the joint ventures. The piece titled “Launching a World Class Joint
Venture” was written by James Bamford, David Ernst and David Fubini was
published in HBR in February 2004. Like other classics, this piece retains its
importance and value even today. Joint ventures pose significant challenges to
the firms as they move into different markets. The objective might be
essentially to create a temporary vehicle in testing waters of the new river
but the challenges it brings to the tables often drowns the objective and the
end result may end up very differently from what was sought to be achieved. Therefore,
revisiting the tenets posed by this article is worth the time.
The article
posits challenges for the joint venture to emerge in four different areas. It examines
each of these areas and then goes to suggest how the firms can work in
resolving the conflicts that emerge in building the successful joint venture. The
four areas the authors visualise to pose challenge to joint ventures are in
strategy, economics, governance and organization. The first challenge emerges
in what strategists and economists both term the agency costs. The interests of
the parent firm and the partner firm might be different. If the parent firm has
different strategic interests in contrast with the other firm, the venture is
likely to experience a lot of headwinds. The second part emerges in the
governance structures. The governance structures would have evolved over many
years in both the firms and would be difficult to change the same. The reporting
metrics too might different significantly across the firms. Each of the parents
control different stakes in the child venture which might complicate decision
making given each parent being interested in imposing their metrics and
governance models into the new firm.
Joint ventures
rarely have an independent system of their own and borrow the same from their
parents. Often at least in the initial stages, parents provide ongoing
services, staffing and other resources to the joint venture. The economics of
the firm might be disrupted in this context. The key issues of transfer pricing
unless resolved would derail the firm economics at the JV level. At the organizational
front, there are bound to be cultural differences, misalignment of career paths
between the parent firms which spills over to the joint venture. These create
disruption in incentive mechanisms and thus the organizational goals experience
stress.
As the article
posits, the joint ventures are of four types. Consolidation joint venture
results from the value addition created by deep combination of existing
businesses. The next type, the skills transfer JV as the name suggest owes its
prospective value creation through a transfer of critical skill sets from one
or more parents to the JV. Sometimes the skill transfer might happen from one
partner firm to another partner firm. On certain occasions, there are lot of
complementarities that exist among different partners that enable them to
generate value in the JV thus resulting in what is termed coordination JV. In
some instance, the capabilities developed by existing businesses enable value
creation in the JV to create growth thus it being termed as new business JV. The
strategic alignment might actually differ and implemented wrongly in different
types of JVs. In the first two instances, the authors suggest the importance of
the transition team to focus on maximising operational synergies while the
latter two necessitate the transition team to focus on expanded market
opportunities. The distinction has to be understood if the transition has to be
smooth and successful.
The authors present
a plan on successful execution of the joint venture in each of those challenge
areas irrespective of the type of JVs. The authors contend the strategic
interests of the parents in a JV must be defined upfront. Any confusion or
conflict will derail their objectives. The authors believe that first year
goals for the JV must be delineated before the launch of JV. The governance
structures need reframing. The JV must be given independence to develop its own
systems. They suggest an apparent loose-tight governance to work better in the
JV. They stress on the importance of creating clear protocols for decision
making in the JV. The economics must resolve the transfer pricing mechanism. The
JV must be clear on the services being provided by the parents. In absence of
clarity the economic disruption would hurt the JV success. Risk and performance
management systems must be developed for the JV and they must be robust to
withstand the possible disruptions. Organizationally, the JV must secure key
commitment from critical staff in the parent firms. Often there would
step-motherly treatment towards the resources employed in the JV. It is also
possible that one parent might feel the other parent can take care and vice
versa thus creating a child which nobody wants. There must exist a system that
entices value creation and incentivises the employees working in the joint
venture.
The authors
opine that the success of the joint ventures are premised on paying lot of
attention to communication. This is true not just in the launch phase but throughout
the life of the venture. Joint ventures are good option in certain context
something similar to strategic alliances, external contractual vehicle, special
purpose vehicle or even merger or acquisition. These happen when the firms
senses a new business opportunity. Yet as it seeks venture into this new
business opportunity, the firms might not have competent internal resources. They
might not have sufficient time to develop the resources in-house from scratch. In
absence of dedicated internal resources, a joint venture might become a
feasible option. Despite everything taken on board, life might have unpleasant
surprises and the same holds good for joint ventures too. In this context, the
managers must be in a position to act quickly and manage the inevitable
setbacks. There must exist, as authors opine rigorous tracking mechanism to
monitor the goals of the joint venture. Furthermore, the launch team would
perhaps be facing a stiff challenge in seeking to reduce the dependencies of
the joint venture on the parent firm. In fact, the authors view that limiting
inter-dependencies would be a judicious option in ensuring the success of the joint
venture. The organization structure for the JV must be designed outside the
comfort zone of the parent firms if necessary. Joint venture launches are
complex and demanding. Yet in understanding the unique characteristics and
demands of joint venture accompanied by early planning could result in
tremendous rewards for the parents. Therefore, the decision for JV must be
premised on rational foundations and cold calculations.
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