Different companies share their resources and make partnerships and alliances with other organizations when they have to face unexpected circumstances. Today, we’ll discuss the same topic of the joint venture, how it works, its types, advantages and disadvantages, and with examples.
What is Joint Venture Strategy?
A joint venture is a business agreement between two or more companies and business entities in order to achieve a specific goal by sharing resources. It usually results in the form of new business activity. When businesses share assets, they also divide income and expenses.
A joint venture is a separate entity completely different from its individual businesses. For instance, if you’re planning to start a joint venture with any other business, then you need to focus on how it works in terms of management and taxation.
Every business or group of businesses in the business strategy would maintain a separate legal status. A mutually agreed contract would define the resources like assets, property, and money that every business member would bring in the venture. The contract would also outline the division of profit, losses, and responsibilities.
A joint venture could be a type of alliance strategy of two completely different businesses, and they plan to develop something new by sharing their separate expertise. For instance, a business enters into a new market and partners up with locally established businesses to gain a competitive advantage.
How to Safeguard Your business in joint Venture
Draw a Legal Contract
Every business forming a JV should draw a legal contract and protect its interests. The agreement contract of the joint venture should include all the business instructions, division of responsibilities, assets, profit, and losses. The partners should sign the contract and enter the date and make it legal and official. A legal contract clarifies various types of misunderstanding.
Partners should visualize the big picture that how the JV would impact their business. Each business would achieve its desired goal of maximizing profit and customer base. It could provide better results if the venturing businesses don’t compete with each other in the market. It means that the partners should have common objectives and on the same page.
Using available Tools
Every partner in the venture should learn new marketing tools, and how they could use them to their advantage. When you have the knowledge and expertise, then you should all the resources at your disposal and make use of it as much as you can.
How to Create Joint Venture Agreement
Now the question is how to create a legal contract and agreement for a joint venture. It defines the roles, rights, and responsibilities of the partners. However, it covers the following areas;
- How the structure of the joint venture is going to be in terms of whether it would be a separate entity, or not
- Objectives and Name of the venture
- Terms and conditions that how long it would be durable
- How much cash and capital each partner would contribute, and the total capital venture would make
- In case of withdrawing capital, the partners have the permission or not
- How many employees and asset each business would contribute
- The share of ownership of intellectual property among partners developed by the joint venture
- The role, management, control, and responsibilities of partners
- The percentage of sharing of profit among partners in the form of cash or dividend
- The distribution of liabilities and losses
- How the partners should resolve their dispute and conflict of interest
- In case of dissolution and liquidation of the venture, how they should exit and finish the venture
- They should also agree on the non-disclosure agreement to secure commercial secrets, insurance, and indemnification (if one partner harms the other).
Joint Venture Vs Partnership
Businesses firms go on a joint venture strategy to work on a specific project. It’s a co-venture, results in the form of profit and loss, doesn’t require maintenance of account books, and businesses think of it in terms of liquidation.
The partnership isn’t limited to a specific project. Partners give a name to their business, profit from it annually. They create and maintain a separate set of accounting books. Minor can also enter into the partnership, and Partnership Act regulates partnerships.
Types of Joint Venture
There are various types of joint ventures for different types of businesses because they all want to achieve a different goal. Some of the main types are as follows;
Project Joint Venture
As the name implies, this type of venture is limited to a specific project and completion of it. For instance, a business enters into a new market and partners up with the local distribution network channels. Both parties create a contract and outline the terms and conditions of the projects that how the thing would work out.
Functional Joint Venture
It is when different categories of businesses having expertise in different fields make an alliance. It’s to create a symbiotic environment that would beneficial for both.
For instance, a company has an extra storage space and the other business has a fleet of transport. Both of them join hands and solve their inventory management issues. It would save the fleeting and storage cost of both businesses.
Vertical Joint Venture
The vertical joint venture is when two companies need the same supply of raw material. They invest in the supply chain to avoid the disruption caused by the inconsistent and unavailability of the supplying raw material. However, businesses also keep the supply chain secret. It’s because the demand for the finished product is high and limited availability of raw material.
For instance, Mark & Spenser launch their sweet shop and save the external cost. Or the computer manufacturing companies invest in the development of computer chip technology,
Horizontal Joint Venture
The horizontal joint venture is when two companies are manufacturing the same finished final product. One company enters into the new geographical region, and partners with the local company producing the same product. However, the local company has the distribution advantage, and the foreign has the expertise of economies of scale.
Advantages of Joint Venture
- It provides your access to more financial and technological resources
- You have the availability of specialist staff, knowledge, and expertise
- Sharing risks, costs, and liabilities with the venture partners
- You’ll have more manufacturing and production capacity
- It would give you access to a bigger distribution channel and customer market
- It would provide you an opportunity to combine research and development and purchasing cost
- You can offer more products and services to your customers
- You have the opportunity to promote your product by using joint venture
Disadvantages of Joint Venture
- Sometimes contractual agreements have very strict guidelines and limitations that could jeopardize partners’ businesses
- There isn’t any support in the early stages
- Entering into the different culture and geography could cause misunderstanding
- Unequal distribution of resources and liabilities
- There isn’t any link between investment and expertise
- Different expectations of the members
- Lack of communication among partners
- Unclear objectives
Examples of Joints Venture
GSK pharmaceutical company and Google went on the joint venture, and it lasted for 7 years. Both of them had an ownership ratio of 55%-45%. The purpose of the venture was to manufacture bioelectric medicines and they invested 540 million Euros.
Volvo heavy vehicle manufacturer and Uber started a joint venture to work on driverless technology. Both of them invested capital of 350 million dollars and both of them had the ownership of 50%-50%.
Ericsson and Sony started a joint venture to develop gadgets and smartphones. Sony bought Ericson years later after working together.
ABC Disney and NBC went on a joint venture in 2008 to develop a video streaming platform both for mobile phones and desktops. The final product “Hulu” was a huge success and it received an offer of 1 billion dollars.