What is Joint Venture? Advantages, Disadvantages

What is Joint Venture?

When two or more firms join together to create a new business entity, it is called a joint venture. In this kind of agreement the companies share their core competencies and share the ownership. Environmental factors like social, technological, economic and political environments may encourage joint ventures.

There are five common objectives in a joint venture:

• Market entry
• Risk/reward sharing
• Technology sharing
• Joint product development
• Conforming to government regulations

Types of Joint Ventures

Joint Ventures can be divided into four types:

Project-Based Joint Venture

Companies engage in this form of joint venture to carry out a specific task, such as the execution of a specific project or the provision of a specific service together. Typically, this kind of cooperation is carried out by businesses for a single, distinct goal, and as a result, it ends once the particular project is finished. In other words, these kinds of joint ventures are constrained by a certain project or by the passage of time.

Functional Based Joint Venture

In this kind of joint venture arrangement, businesses collaborate to benefit both parties by leveraging their complementary functional knowledge in specific fields and enhancing their performance. Companies weigh the likelihood of performing better jointly than doing it alone and more effectively when deciding whether to enter such a joint venture.

Vertical Joint Venture

This kind of joint venture involves business dealings between suppliers and customers. When bilateral trade is not advantageous or economically viable, it is typically preferred. In these joint ventures, suppliers typically get the biggest rewards while purchasers only see modest improvements.

These ventures integrate many phases of an industry chain in order to increase economies of scale. Vertical joint ventures typically have a greater success rate and strengthen relationships between buyers and suppliers, which ultimately benefits businesses by enabling them to provide customers with high-quality goods and services at competitive costs.

Horizontal Joint Venture

This kind of joint venture involves a transaction between businesses operating in related industries. They could generate an output that can be marketed to the same clientele or use the joint venture’s items to sell to their clients. Since the alliance is between participants in the same industry, managing a horizontal joint venture is typically difficult and frequently leads to conflicts.

Due to the fact that they are in the same broad field of business, these kinds of joint ventures also experience opportunistic behavior between the partners. In these kinds of joint ventures, the profits are shared equally by both sides.

Advantages of Joint Venture

When evaluating the potential of this business structure, there are a number of joint venture benefits and drawbacks to take into account. Let’s look at the advantages first:

No Long-Term Risks

There is no long-term commitment because joint ventures are designed to be short-term. Partners set out to accomplish a specific goal and stop when it is accomplished. It is a short-term arrange- ment that enables two or more businesses or people to support one another in particular circumstances.

That implies that by establishing this arrangement, you are not taking any long-term risks. Most contracts provide for an escape strategy that can restrict each party’s financial obli- gations in the event that something goes wrong without warning.

Increased Expertise

Distinct partners may bring different experience and skill sets to the table. Using various R&D techniques used by the tech firm, for instance, a joint venture between a pharmaceutical company and a tech company may produce new goods more effectively. Each agency has the chance to develop new perspectives and experience in particular facets of their sector when they join forces to launch a joint venture.

Since one firm has access to a market and the other has greater resources for research and development, this structure is perfect in those situations. There are no long-term commitments that can later turn into financial anchors, making the targeted demographics simpler to comprehend.

Market and Resource Access

Combining assets and activities results in scale efficiencies for the parties. If the two partners’ operations are successfully integrated, this could lead to a rise in productivity. By part- nering with a local/domestic partner, one partner may receive exposure and access to a wholly untapped market. An Australian company might partner with an Indonesian company, for instance, to increase their visibility and grow their business.

It provides greater resources for everyone engaged. The specialist employees and resources that are offered by each organization can be utilized by each enterprise. All essential ­ capital and equipment become a part of this general agreement, eliminating the need to acquire new employees or develop these opportunities on a company-wide basis.

Disadvantages of Joint Venture

Every decision has advantages and disadvantages, and joint ventures are no different. Let’s think about a few drawbacks of joint ventures:

Imbalance

Two types of imbalance can exist: an imbalance in contributions and an imbalance in level of skill. This could result in unbalanced contributions from each party. Due to the fact that the rewards do not match the initial effort, it has a negative effect on the connection.

This is why the initial documentation that creates this new organization must include a valuation of intangible assets, such as the location of an agency.

Work-Culture Conflict

Partners may have different managerial styles. This may lead to divergent expectations from the persons concerned. Different companies have their own unique managerial styles that they implement. The joint venture arrangement may not integrate well if these two cultures are in conflict with one another.

This disadvantage can make an agreement fall apart before any advantages can be realized due to a lack of cooperation. Even if there are proactive efforts to manage this problem, leadership groups that have different preferences, tastes, or beliefs can find that these issues can get in the way if they are left unchecked.

There are also quite a few possible disadvantages to joint ventures. Leadership gaps can form in some joint ventures. Companies can restrict or eliminate the flexibility found in joint ventures. When agencies come together to form a joint venture, then one of the stipulations that govern the arrangement involves future outside activities.

These contracts frequently impose limita- tions on the participant companies’ ability to engage in other outside activ- ities while the agreement is in force. To do so would require putting off or ignoring a new business opportunity that arises while working in a joint ven- ture, and doing so could be expensive.