Making Joint Ventures A Strategic Success 12-19

Making Joint Ventures A Strategic Success

A joint venture represents the optimism of two firms that they can unite to achieve marketplace goals that neither could achieve alone. Some joint ventures work, some do not. Sikander Shaukat, Managing Partner of Resource Dynamics and alumnus of London Business School, describes the steps that will maximise the chance of success.

Joint ventures (JVs) can be a rapid and very effective mechanism for strategic growth. Such unions can enable fast access to new skills and technologies. Beyond that, JVs can secure production capacity and lower cost production; offer access to both local and distant markets; and offer ways of creating economies of scale and market power.

Yet, such corporate linkages, regrettably, often come down to agreements on the duration of the JV and how costs and profits will be handled. That is, the JV becomes limited and limiting. There are other important strategic factors that should be considered in a JV, such as the term of arrangement, its workability, protection of know-how, benefits and progress towards strategic goals. These represent a more relevant perspective of partnerships, even though it needs more than common sense and financial modelling to deliver a working union of interests.

The solution

Creating a successful JV entails taking seven steps.

01 Identify

Identify strategic logic and drivers. It is very likely that an organisation and its JV partner(s) have adopted two different marketplace approaches in terms of how they compete. One company may be competing on the basis of economies of scale; another on the basis of a low-cost offer, another on the basis of branding and marketing flare, another on the basis of sales and servicing — and yet another on its product features and design or some combination of each in different compositions. 

These differences in the strategic logic of each firm permeate all aspects of practices in each organisation, affecting the way decision-making is executed and what is considered an operational priority. These differences can be either complementary or a hindrance to the alliance. It is critical to understand the strategic logic operating in each organisation for the success of the venture. To succeed, a JV must clarify the important drivers for the joint venture over and above the profit potential.

02 Valuate

Valuate each firm’s product architecture. If each company in a JV breaks down its individual products and offers to customers, the component parts could potentially be repackaged into a new (and very attractive) offer to customers. For two firms to do this, it is critical to understand the possible effects of each component on the new product mix of the JV because of potential changes in the business environment as a result of the recombination of components. This will help each firm to forecast better, reflect the evolving nature of the JV business and set the right expectations of volumes and terms of agreement.

 Furthermore, this process provides critical insights and boundaries for protecting the intellectual property of each firm. This evaluation may lead to adjustments in the product architecture itself and may open up new avenues of other possibilities as a by-product.

03 Construct

Construct an effective operating structure. Each organisation in a JV normally separates and aggregates its operating activities (also called the operating model) in unique ways and for a myriad of reasons. For example, one credit card company may have the chargeback activity as part of its disputes resolution department and another firm may have the two separated.

Every organisation also has different ways of prioritising and measuring its effectiveness. These operating values are recognisable when operations managers see ‘doing a good job’ as some combination of volumes produced, standardisation, flexible staffing, quality standards met, customisations produced, repeat orders and so on. It is important to understand these differences in the organisations that make up the JV to ensure workable agreements, recovery of services, setting up the right measures and responses.

04 Define

Define the new business model. The firms in a JV must define the nature of the new venture including the proposition to the customer, the channels and relationship management, the value chain, the structure and roles, investments, income, costs and payments, success factors and the timetable for delivery. This agreed-upon new business model provides the backdrop for the legal and financial frameworks that will be the true borders of the joint venture.

05 Create

Create an economic system that will work for all. Key players in the JV must build a congruent economic system that includes a risk-adjusted cash flow model, break-even analysis, unit costing and economic value-added rationale for the new business.

06 Ensure

Ensure that all negotiations are win-win. For each player in a JV, the art of negotiating joint ventures (just as in mergers and acquisitions) is to know yourself, know what is important to you and know your limits and boundaries — then go on to have some knowledge of the same for your counterpart. The goal, at all times, must be for no firm in the JV to feel that it is losing by engaging in the new commercial union.

Negotiations conducted in this way help to give a very clear picture of the aspects important to both businesses and the potential partners’ priorities and operating latitudes. Moreover, the negotiations should provide for rapidly evolving models (particularly financial ones) to represent the consequences of new decisions and actions, not only during negotiations but also as the JV grows and evolves.

07 Shake hands

Shake hands and lock arms. The contracting phase of a JV represents the formal contractual agreement underpinning the JV and is carried out by commercial lawyers. Yet, for all good joint ventures, behind every contract on paper is a strong relationship between the different players. And it is this relationship — as much as it is the contractual terms and conditions — that truly solidifies the JV as its strength and mettle are tested in the marketplace.

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