Assume you have a company and another company approaches you to join them on a joint venture. What are some of the things you should consider? How do joint ventures work? What are the benefits and drawbacks of participating in a joint venture?
Read along to find out the answers to these questions and much more!
Joint Venture Definition
The joint venture definition revolves around agreements between two or more parties to combine their existing resources and capabilities.
A joint venture is an agreement between two or more parties to combine their available resources with those of the other party (or parties) to complete a particular objective.
This assignment may be a brand-new project or any different kind of commercial endeavour.
When working in a joint venture, each party is accountable for its share of the earnings, losses, and expenditures involved with the venture. Nevertheless, the enterprise stands alone as a distinct entity, independent from the partners' other commercial interests.
Organisations can create joint ventures with entirely different legal structures. Joint ventures (JVs) may be formed by various company structures, including corporations, partnerships, limited liability companies (LLCs), and other commercial organisations.
Organisations may establish joint ventures for production purposes, research purposes, etc. Major corporations and smaller businesses may work together in a joint venture to undertake a single or several large projects.
Companies' participation in joint ventures has four primary motivations: cost savings, leverage resources, combined expertise, and entering foreign markets.
Cost Savings. By making use of economies of scale, both enterprises participating in the joint venture can leverage their production at a lower cost per unit than they could achieve individually.
Leverage Resources. When two businesses form a joint venture, they can pool their resources and work toward a common objective more effectively. One business may have a well-established production process, while the other company may have more robust distribution methods.
Combined expertise. Two firms or parties creating a joint venture can have distinctive histories, skill sets, and areas of expertise. When brought together in a joint venture, each firm may reap the benefits of the other's knowledge and ability inside their organisation.
Enter Foreign Markets. Another widespread use of joint ventures includes joining forces with a local company to break into an international market. Suppose a firm wishes to expand its distribution network into other nations. In that case, engaging in a joint venture arrangement with a local business may be beneficial.
In 2003, the German automobile company BMW joined forces with the Chinese automobile maker Brilliance Auto Group to create a joint venture. BMW Brilliance is the name given to the joint venture that was established to manufacture and sell BMW vehicles in China. This is an example of a joint venture formed for the purpose of entering a foreign market.3
Joint Venture Marketing
Joint venture marketing serves a similar structure to joint ventures.
Joint venture marketing refers to an agreement between two or more parties to combine their marketing resources in the pursuit of expanding their respective shares of the market and their respective revenues.
Although joint venture marketing may seem similar to a partnership, there are important distinctions between the two.
When businesses decide to work together in a partnership, they integrate all aspects of their operations and manage the institution as if it were a single unit.
On the other hand, when it comes to joint venture marketing, the focus is exclusively on a combined marketing strategy meant to assist both businesses in achieving their financial and marketing objectives.
The target audience of businesses participating in joint venture agreements grows, enabling such companies to reach more potential consumers.
In addition, businesses may merge their assets and resources, such as their workforces, databases, product lines, and even market research. Because both firms have a stake in the marketing efforts' outcome, whether successful or not, joint venture marketing agreements do not include massive amounts of risk. This is because both businesses are incentivised to work hard to ensure the venture is successful.
Joint Venture Marketing Strategy
A joint venture marketing strategy involves a signed contract that outlines the company's roles, the goals of the joint venture, and their respective portion of the earnings.
After signing a joint venture agreement, both parties will be entitled to their proportionate share of the profits generated by the enterprise, and the joint venture will run under shared management.
If the joint venture agreement is legally declared to expire within a specific time or if the parties have mutually decided to end the deal, it is possible to cancel the agreement and walk away from the partnership.
Joint Venture Advantages and Disadvantages
There are many joint venture advantages and disadvantages.
Joint Venture: Advantages
One of the main advantages of joint ventures is that it enables companies to develop more quickly, be more productive, and make more money.
It also makes it possible for companies to gain access to other distribution networks and new markets. This, of course, depends on the type of companies forming the joint venture.
Joint ventures come with combined expertise and knowledge. Companies will gain access to additional knowledge and skills that will help expand the joint venture further.
For example, a company with a great finance team might collaborate with another company with highly professional tech personnel. This enables both companies to benefit from one another.
As companies join their resources, another great benefit is that they can expand without borrowing from investors. This is beneficial as neither company has to take on debt or give away equity.
Joint Venture: Disadvantages
Perhaps one of the most significant disadvantages of a joint venture is that it limits the companies participating in a joint venture from external opportunities they may have.
Some joint venture agreements require each firm to sign an exclusivity or non-compete agreement that will impact their existing ties with various business contacts and suppliers.
These agreements aim to keep the focus on accomplishing the joint venture's aims while reducing the possibility of potential conflicts of interest.
The contractual limits are withdrawn when the joint venture is terminated, but having them in place throughout the project may make it difficult for one party to conduct business as usual.
Another disadvantage includes unequal distribution of work and resources. The firms that participate in a joint venture share ownership over the project. Nevertheless, the division of labour and the allocation of resources directly related to the fulfilment of the joint venture are not necessarily distributed equally.
One participating firm may be expected to provide technology, access to a distribution channel, or manufacturing facilities throughout the joint venture, while another provides staff or limited resources.
Joint Venture Examples
There are plenty of joint venture examples. Let's have a look at the joint ventures between Microsoft and GE and Boeing and Lockheed.
Microsoft and GE formed a joint venture in 2012 to enhance healthcare quality and patient experience using data known as Caradigm.1 Caradigm is a notable joint venture. The joint venture combined Microsoft's skills in producing large-scale data platforms and GE's expertise in developing healthcare apps to create an innovative new company.
Years later, GE purchased Microsoft's interest in the firm and controlled it until another company acquired it.2
United Launch Alliance (ULA) is the joint venture that launched the Curiosity rover in 2012, which found that Mars was once warm and wet. Lockheed Martin and Boeing established ULA in 2006. The now-partners competed to launch US federal satellites.
When SpaceX slashed its rates, the rivals joined together to decrease expenses. Since starting the 50/50 collaboration, the partners have launched over 100 satellites. Both have national security and research missions contracts, making them SpaceX's primary competition for government launches.4
This is one of the many joint ventures that have led to world-changing discoveries and advancements.
Joint Venture vs Partnership
A partnership and a joint venture may look similar. Both involve several parties working together on a project. However, there are differences between joint ventures and partnerships.
Partnership refers to the form of business that entails having two or more people sharing ownership, including the company's income and losses.
Two or more people create a legally recognised business partnership. A joint venture might include people, organisations, governments, or enterprises.
A partnership's objective is operating a company or long-term venture rather than a particular project or aim. Joint ventures have a special purpose. Each party contributes to a task. The joint venture may not seek profit at all.
Universities and pharmaceutical corporations collaborate to research new medications.
Partnerships persist as long as the company. In contrast, joint ventures have short-term project lifespans. They are supposed to endure long enough to achieve an objective.
Joint venture - Key takeaways
- A joint venture is an agreement between two or more parties to combine their available resources with those of the other party (or parties) to complete a particular objective.
- Companies' participation in joint ventures has four primary motivations: cost savings, leverage resources, combined expertise, and entering foreign markets.
- Joint venture marketing refers to an agreement between two or more parties to combine their marketing resources in the pursuit of expanding their respective shares of the market and their respective revenues.
- Partnership refers to the form of business that entails having two or more people sharing ownership, including the company's income and losses.
References
- Microsoft, Microsoft and GE Healthcare Complete Joint Venture Agreement, https://news.microsoft.com/2012/06/06/microsoft-and-ge-healthcare-complete-joint-venture-agreement/#:~:text=(Nasdaq%20%E2%80%9CMSFT%E2%80%9D)%20today,quality%20and%20the%20patient%20experience
- SignifyResearch ,Caradigm Sale – The Final Step in GE’s Exit From PHM/Value-based Care,https://news.microsoft.com/2012/06/06/microsoft-and-ge-healthcare-complete-joint-venture-agreement/#:~:text=(Nasdaq%20%E2%80%9CMSFT%E2%80%9D)%20today,quality%20and%20the%20patient%20experience.
- BMW Group Press, BMW Group strengthens partnership in China: Extension of Joint Venture Contract until 2040 enters into force, https://www.press.bmwgroup.com/global/article/detail/T0367992EN/bmw-group-strengthens-partnership-in-china:-extension-of-joint-venture-contract-until-2040-enters-into-force?language=en#:~:text=Founded%20in%202003%20with%20Chinese,in%20Shenyang%20(Liaoning%20Province).
- space.com ,United Launch Alliance: Combining the forces of two aerospace giants, https://www.press.bmwgroup.com/global/article/detail/T0367992EN/bmw-group-strengthens-partnership-in-china:-extension-of-joint-venture-contract-until-2040-enters-into-force?language=en#:~:text=Founded%20in%202003%20with%20Chinese,in%20Shenyang%20(Liaoning%20Province).
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