Why Joint Ventures Die?

1. Why Joint Ventures Die?

2. General Motivations For Joint Ventures • Risk Sharing • Gaining Economies of Scale • Exchanging Technology • Exchanging abilities

3. Fundamental Conditions Pushing For Alliances • Motivation For Joint Ventures • Fear • Profit • Organizational Learning

4. Fear • Future Prices • Guaranteeing Quality • Guaranteeing Delivery

5. Profit When companies join a joint venture, profit can be gained in two ways. • Oligopoly the market • Reduction of costs or Creation of new products

6. 1. Oligopoly the market Between the firms in oligopoly, joint ventures can stabilize competition and improve industry returns. Oligopolies are price setters rather than price takers. For example,

7. 2. Reduction of costs or Creation of new products Increased profitability can be derived from the reduction of costs or the creation of new products that can influence the competitive positioning of the partners.

8. For example, a creation of new product from General Motor and its Korean partner Daewoo • GM facilitated the export of low cost vehicles from Korea through the distribution network in the United States. • To slow down the penetration of Japanese competitors, who seeking to upgrade their auto-lines into higher priced levels.

9. Organization Learning Joint ventures are usually formed to combine the strength and allow firms transfer the knowledge among partners. Sharing knowledge is important when firms join from different industries.

10. For example, the joint venture between Honeywell and Ericsson • To create a telecommunication switch for the US market. • Honeywell is an expert in in-house software and has the ability to run a development facility in the US. • Ericsson had the technology in development and sales of the product in international market. • Products successfully adapted to the market.

11. Causes of Termination of Joint Ventures • 13% of Joint Ventures die within the first year. • 3rd year of a Joint Venture is extremely unsafe. • Depends on external circumstances. • Acquisitions occurs from: few competitors, and unexpected growth.

12. Rates of Termination of Joint Ventures

13. Causes of Termination of Joint Ventures

14. Causes of Termination of Joint Ventures • Dissolutions depends on whether or not the parties have other business agreement. • Joint Ventures often choose to divest or expand. • Their stability is strongly affected by the familiarity and commitment of the partners.

15. Lessons for the design of Joint Ventures • There is no failsafe design for a business plan • 1 simple reason that joint venture is especially difficult for: • It is under the ownership of more than 1 firm

16. Joint Ventures • Contract does not make a good reading • Eliminate the need to reread the terms so often • Design the venture to guarantee your sleep • Do not burden the joint venture • Choose the right benchmark for evaluation • Build for the future

17. Design the venture to guarantee your sleep • Worry about loss of control over technologies and brand label • Eliminate the problem by assuming the problem will occur • What is it worth for you? • Sell it as a part of the capital contribution of your firm to the venture • Priceless, don’t share

18. Design the venture to guarantee your sleep • GM & Toyota – agreed not to create or share a common brand label • Honeywell & Erickson too did not share a brand label • Market reputation – hard to get • Sharing brand label is often necessary, but some loss of sleep can be expected

19. Do not burden the JV • Logical that partners will try to get something out of the venture • Suffer temptation to burden venture • Excessive channels of remuneration • Transfer prices on goods sold or bought from the venture • Employee salaries • Licensing fees • Royalty fees

20. Choose the right benchmark for evaluvation • JV is not a popular decision • Engineer & Managers gets upset • The benchmark should concern on how the return of the ventures(investment) compares to an outright divestment

21. Build for the future • No one ensures the success of JV • Important that JV be supported by wider relationship among partners • Work out how relationship of each partner in the industry affect cooperation

22. Build for the future • No organization is forever • JV – stepping stones to something else • Designed for success but also flexible to change • dissolution or acquisition • Managers – manage JV of how and why the alliances die