What is a joint venture?
A joint venture is an agreement between two or more independent businesses that involves sharing costs, risks, responsibilities, profits, and other resources associated with a project. The businesses involved are separate; they only decide to work together without completely becoming one business.
A joint venture provides an easy way to penetrate new markets, access more finance, and gain superior technology. For example, a company can form a joint venture with another company in a different country, making it easier to overcome the obstacles of penetrating a foreign market such as limited knowledge and complex regulations. The businesses involved can also employ division of labour, with each specialising in its area of expertise or strength. For instance, one company may have superior technology while the other has strong marketing expertise; both can benefit when they combine their strengths through a joint venture.
Advantages and disadvantages of a joint venture
Advantages of a joint venture
New markets are readily penetrated
A joint venture facilitates access to multiple markets, both domestic and international. For instance, it could be challenging to enter a foreign market if you are unfamiliar with local laws, consumer preferences, and the location. By working with a domestic company on the ground, a joint venture offers a framework for a business to sail through readily. The foreign company might only need to supply the project’s technology or funding.
Sharing expenses and risks
The sharing of the financial burden is one of the main benefits of a joint venture. Certain projects may be too risky and financially demanding for a single business. Businesses can combine their resources for these kinds of projects through joint ventures. For instance, the partners may split all project expenses for a power plant, including marketing, labour, equipment, and land. This lowers each company’s risk and financial commitment.
Benefit from specialisation
Every company concentrates on its strengths, such as technology, skilled marketing personnel, and a robust customer base. As a result, the participating companies contribute a variety of resources, expertise, and experiences. Compared with when one of the companies acts alone, the joint venture business can achieve better success.
Lower costs
By working together on big projects, joint ventures can save money. As a result, they can take advantage of economies of scale in marketing, technology, and material purchases. Profits increase when expenses are reduced.
Cheaper way to grow
It is quicker for a business to grow with a joint venture. It allows the business to spread to other regions or countries with limited resource commitment. It can enjoy success by leveraging the expertise or technology of another business.
Disadvantages of a joint venture
Slow decision-making
There is a need for consultation among the joint venture partners before making vital decisions. This can slow down the project’s progress, especially in situations where quick decisions must be made. The business, as a result, may not be quick enough in responding to changes in the market.
Disagreements
The project brings together entities with different values, cultures and management styles. This makes it difficult to agree on a lot of issues. Constant disagreements may constitute a clog in the wheel of progress of the project.
Misuse of valuable resources
A joint venture gives an entity access to the resources, technology and expertise of another organisation. This can later be used to the benefit of the party that has been given access after the project has ended,
Profits are shared
It is not only costs and responsibilities that are shared. The profits, if any, must also be shared among the partners, unlike a sole trader where all profits belong to the owner.
Jointly liable for mistakes made by any partner
The mistake of any partner in the joint venture rubs off on all of them.
Why a joint venture may fail
A partner blames another for an error
Joint venture partners are jointly responsible if anything goes wrong. But when one partner exonerates itself and blames others for any problem or error, the agreement may break down. Blaming others can lead to demotivation and conflict.
Absence of exit strategy
The parties must stipulate in advance how to end the business when the need arises. A joint venture is a “business marriage,” and there must be a premarital agreement on how long until companies can compete directly against each other again, data ownership, what happens if a partner is not willing to continue with the partnership, etc.
When one firm is unwilling to cede control
The companies in a joint venture bring different expertise and strengths to the table. Based on the arrangement, each company is assigned a particular task. The joint venture may fail if one party interferes with the activity of another partner because it feels it is better at it. They are to complement, not compete against, one another.
Collapse of one of the companies involved
The failure of one of the partners can spell doom for the joint venture. A business that has collapsed cannot fulfill its obligations or responsibilities to the joint venture business.