Partner selection for joint-venture agreements

R G Williams and M M Lilley

The selection of partners for joint ventures poses many problems for potential participants. The paper examines the influencing factors which should be taken into account so that the performance of such alliances can be improved. A model is developed which places the factors in sequence within the evolution of j’oint-venture projects. An inter- nationalj’oint venture is considered to illustrate and prove the model. The case follows the general sequence of events described by the model, but it is concluded that the model provides a broadframework rather than a prescriptive set of activities to be followed in strict sequence.

Keywords: business management, joint ventures, inter- national cooperation

The growth in international cooperative behaviour be- tween companies represents a significant change in the nature of commerce. These changes pose many problems for joint ventures, whether national or international, and management practices for dealing with these are still developing’.

The stability of any business organization is influenced by a number of factors, for example the health of the industry, the degree of competitive rivalry, and the efficiency of production, innovation and management2,3. Joint ventures are affected by any of these, as well as the cooperative behaviour of the partners. The selection of an appropriate partner, therefore, is paramount in im- portance if the joint venture is to succeed.

Executives may enter into arrangements before being fully aware of the consequences, only to find their partner’s management style, innovations, motivations and commitment are at odds with their own*. It can be argued that choosing a business partner is very like

European Business Management School, University of Wales, Swansea, Singleton Park, Swansea SA2 8PP, UK

choosing a spouse4. It is an individual decision, and the ideal partner for one marriage may be a mismatch in another. Possibly as a result of this attitude, little has been written about joint-venture partner selection.

Geringer5,6 is one of the few people to have studied the subject at any great length. He sets out several factors which need to be considered in the selection of suitable joint-venture partners. This paper takes Geringer’s cri- teria for partner selection, and places them in chrono- logical order within the general process of partner selection; it examines the individual importance of each factor in selecting suitable partners, as well as the stages in the selection process at which they should be con- sidered. The model is then compared with the approach adopted by a large UK chemical company in its search for a joint-venture partner to rationalize the production of PVC.

MODEL AND ITS INTERPRETATION

Figure I illustrates the process of selecting a joint-ven- ture partner. The left-hand column shows a flowchart of the phases involved in the selection process, and the right-hand column represents influences which come into play at particular stages.

Primarily, a company needs to distinguish its future goals and act accordingly. Such aims may involve ex- panding to a new market, gaining access to new technol- ogy, distribution networks and marketing experience, or rationalizing production, exploiting economies of scale, or minimizing transaction and production costs. Once the company’s future objectives have been identified, the next step is to decide how they can be accomplished. If the need for a joint venture is then identified, the subsequent problem is the selection of a suitable partner.

Initially, companies need to be concerned with stra- tegic compatibility, complementary skills and resources, relative company size, and financial capability. It should thus become apparent which firms cannot provide the necessary attributes to form a successful joint venture.

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Partner selection for joi~~t-~e~ltL~~e agreements

Strategic compatibility

It is essential that partners have the same general objectives in forming a joint venture; differences in strategy produce conflicts of interest among partners.

Determining a prospective partner’s motives is often difficult, but it is an essential task. This analytical process should involve not only the firm’s current situation and goals, but also scenarios of likely future strategies. It is important to remember that, generally, no matter what the initial agreement on control and ownership may have been, environmental and strategic changes over time may alter, which, in turn, may well affect the original agreement.

Joint ventures tend to work only as long as each partner believes that it is receiving benefits, or is likely to benefit in the relatively near future. Owing to differ- ences in goals, what is good for one firm may be a disaster for another. A compatible partner, ideally, therefore, is one with similar values and goals, in both a short- and long-term sense. This is particularly critical when the strategy stakes, such as the size of investment, and the potential effect on corporate image, increase in scale. If such strategic compatibility does not exist, the joint venture should not be pursued.

Looking at the case study, the major objective for the British entering into a joint venture was production rationalization. The company indeed rejected two firms as prospective partners at this stage in the selection process as they did not meet the necessary requirements. The Italian company selected was considered to be suitable as they, too, wished to reduce capacity and

Defimtion of New mark~,finan~e,

future goals - technology, economies

of scale, costs,

c rationalisation etc

ldentificotion of a need fora joint venture

i identification of prospective - partners

I

I Strategic compatibility 2 Complementary skills and

resources 3 Relative company size 4 Financial caoabilitv

I . Detailed 5 Compatibility between

negotmtions - operating policies 6 Compatible management

i teams

Relimmofy project imolementation

7 Trust and commitment

,8 Mutual dependency I9 Communrcation barriers

/I Figure I. Partner -selection process

234

improve competitiveness without adversely affecting the total business.

Complementary skills and resources

Another primary selection criterion to be considered should be a potential partner’s capability of providing the skills and resources sought by the other firm, for example finance, distribution, and marketing. If the company cannot provide these factors, joint-venture formation with that particular company should not be pursued.

To determine such complementarity, the key success factors for the joint venture should be defined, and then compared with the prospective partner’s current and proposed position. Areas where deficiencies exist should then be considered carefully, and, wherever the necessary criteria are not met, the company should be rejected.

Returning to the case study, the Italian company met the necessary requirements as they operated in markets different from those of the UK firm, and they were a multisite, multiplant organization, As a result, the com- pany could rationalize production and provide the necessary facilities for continued operations.

Relative company size

Joint ventures have the best chance of long-term success if both partners are comparable in sophistication and size. Larger companies typically offer greater ‘staying power’, being able to commit a greater volume of resources over a longer time horizon. However, joint ventures between firms of different sizes are often just- ifiable. A smaller firm may share its innovative technol- ogy with a larger firm offering finance, marketing, distribution etc. Significant size differences can, however, lead to problems. One concern is the possibility of the domination of one firm over the other.

A related problem is that partners’ different oper- ational environments and corporate cultures may appear to be incompatible. For instance, the bureaucratic en- vironment of many large firms, with relatively slow decision-making apparatuses, contrasts sharply with the more entrepreneurial and quick-response orientation characteristic of small firms.

Some problems arising from a difference in size can be overcome by creating a special operating environment for the joint venture. For instance, the effects of partner- size differences can be reduced by giving the joint venture a free hand in many activities, permitting quicker re- sponses. This emphasis on autonomy is particularly appropriate for ventures which confront rapidly chang- ing environments. A willingness to allow such autonomy might, therefore, be a consideration in the selection of a partner.

Even if managers strongly desire partners with similar cultures, that need not restrict joint ventures to firms of the same size. The relevant measure is often not absolute corporate size, but the relative size of the respective business units. Managers may, therefore, seek partners of similar sizes at the business or the division level. Both partners should, therefore, have similar perceptions of time as a vital component in the joint venture’s success.

International Journal of Project Management

R G WILLiAMS AND M M LILLEY

This particular issue was fundamental to the UK/Italian venture. Both the companies needed to be able to sustain similar plant closures, as well as provide the relevant facilities for continued operations. As a result, the agreement could only expect to be successful if the companies were of similar relative size.

Financial capability

Finally, for this stage, it is essential to be sure that a prospective partner can generate suf%ient financial re- sources to maintain the venture’s efforts. During a joint venture’s early stages, when large negative cashflows are common, the presence of a ‘limit’ can jeopardize an entire project. It is not always possible to identify a company’s fmancial limitations~ however, its financial history and overall financial standing may well indicate potential problem areas. 1t may, nonetheless, be prudent to include a clause in the joint-venture agreement to cover such an eventuality,

This particular perspective did not require much at- tention in the case study as any problems in this area could always be overcome, since the two companies were large multinationals with the necessary resources avail- able to them.

Having considered these first four characteristics with respect to the proposed joint venture, it should now be possible to reject certain firms as prospective partners, Others can be shortlisted, At this stage, it is necessary to enter into more detailed negotiations to judge a partner’s suitability. A company should now be interested in analysing the following: compatibility between operating policies, compatible management teams, trust and com- mitment, mutual dependency, and communications bar- riers.

Compatibility between operating policies

Partners should be clear about the types of policy with which they will be comfortable working, for example accounting systems, investment, and vacation policies Differences in operating approaches often result from cultural biases, and managers, not conscious of the existence of these biases, may take it for granted that there is a ‘right’ way to do things.

The compatibility of partners’ operating policies should, therefore, be considered before a joint venture is formed. Differences need to be ironed out at this stage to avoid severe problems later on.

The UK and Italian companies considered this par- ticular issue in great detail to reach agreement on the organization’s structure and operations. The main area of contention was administration, as the production sites would not be moved. The two firms decided on a coordination centre and a separate controlling hofding company, The sites were chosen to benefit from tax concessions, as well as for their central geographical location”

Compatibge management teams

In addition to agreement an operating policies, compat- ibility between management teams is an essential ingredi-

ent in the success of a joint venture. The inability of management to ‘take to each other’ is frequently cited as the basis for rejecting a prospective partner or terminat- ing a joint venture. The essential ingredient is staff with the skill and intuition to spot problems before they arise, and with the competence and influence in their own organization to solve such problems quickly. Managerial compatibility can thus enhance the partners’ ability to achieve consensus on critical policy decisions, and to overcome obstacles. An additional consideration when selecting a partner is, therefore, the quality and turnover of the critical personnel within the management team. Effective management also requires well defined report- ing and information systems to provide adequate com- munications channels between the organizations involved, with the aim of promoting unified planning and control.

When the case study was considered, it was found that, as a result of the 50: 50 division, anything other than a similarly structured management team would have been inappropriate. There were also few problems in selecting staff as geographical location often restricted choice.

Trust and commitment

Forming and operating a joint venture over the long term requires more than cordial relations between man- agement teams. An executive must determine whether a potential partner is willing and able to make the relation- ship work, The partner’s perceived ~stwortbiness and commitment are pivotal considerations, especially if the proposed joint venture involves one firm’s core technol- ogies or other proprietary capabilities which are the essence of the firm’s competitive advantage. One ap- proach is to seek majority control, and another is to structure a legal agreement to address every such contin- gency. However, these responses are unlikely to promote compatibility. Each partner, therefore, needs to be com- fortable in believing that the other will honour the spirit, and not just the letter, of the agreement. A joint-venture relationship is delicate at best, and, without fundamental trust and commitment by each party, there is little hope for a successful working relationship. Thought should, therefore, be given to selecting a suitabie negotiator and support team to build good relationships and win confi- dence.

The UK and Italian companies undertook discussions for a considerable length of time to reach a final agreement. In so doing, trust and commitment were built up, although the UK company did not consider this perspective as a separate issue, but rather as a function of all the other factors that they contemplated through- out the selection process.

Mutual dependency

Joint ventures are a means of creating strengths, rather than intensifying weaknesses, by the partners comple- menting each other. Many managers view dependency on other organizations as undesirable, and have avoided such situations when possible. Yet, with proper match- ing, both partners should perceive a vested interest in the success of the joint venture.

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Partner selection for joint -venture agteemenfs

Thus, there should be some identifiable mutual need, with each partner supplying unique capabilities or re- sources that are critical to success. When one partner is strong in areas where the other is weak, and I;ice uersa, mutual respect is fostered, and conflict can be mitigated. It is usually better to choose a strong partner, as it is a mistake to think that a strong association can be created with a weak partner.

A ‘middle level’ of dependency is the optimal. If the level of dependency is too small, the joint venture is unlikely to survive difficult times. However, too much dependency, such as when small firms enter joint ven- tures with much larger partners, may prove unstable, because of the potential consequences of the loss of a partner. One option to avoid the risks of dependency is to include a clause in the joint-venture agreement. This may stipulate that the unilateral decision to terminate the venture would result in a substantial charge of some sort.

When the case study was considered, it was found that this factor was not looked at during the selection process. This approach probably results from the fact that the joint venture is a 50: 50 partnership between two companies of equal size and status. Neither of the companies, therefore, considered the situation to be problematic.

Communications barriers

Finally, the ease of communication between the partners is another potential problem which should be considered when evaluating a potential partner’s suitability. The greater the cultural gap between the firms forming a joint venture, the more difficult it will be to create the necessary cohesion. Such problems can occur as a result of differences between national or ethnic cultures, in- cluding language, as well as differing corporate cultures. Cultural differences can impede the development of rapport and understanding between partners.

Managers of different nationalities may have differing attitudes to such basics as the desirability of material wealth, the importance of on-the-job perfo~ance~ or the desirability of change. This may lead to greater expenditures of time in negotiations, possibly delaying negotiations or major decisions. However, this factor should only be considered as a supplementary criterion, as language and culture tend not to be insu~ountabIe barriers, particularly for partners from developed na- tions.

When the UK and Italian companies considered this problem area, the differences were found to be minor. The only requirement was a little understanding and adaptation by all concerned.

Selection

Each of the above nine perspectives need to be taken into account by any firm before a joint-venture partner is selected. Certain criteria will be more important to some companies than others, and they should be judged accordingly. However, even at this stage in the selection process, it is not always advisable to enter into a joint venture immediately. An initial period could be used for

firms to cooperate in some activity before formalizing agreements. Such cooperation may then lead to a part- nership in the form of a joint venture. This incremental approach enables managers to keep adding to the com- plexity of things that they trust a partner to do on the basis of previous experience. Such an approach keeps the expectations of a partner lower, and enables managers to be more analytical in assessing why a particular venture did not work out.

DISCUSSION AND CONCLUSIONS

As this paper has shown, the case study generally follows the theoretical process. The nine different perspectives were considered in the selection process, with one excep- tion: mutual dependency. However, it is thought that, rather than implying a deficiency in the model, this is a peculiar case, because of the nature of this particular joint venture. All the other factors were considered by the UK company, and at the stages expected in the model; there was one exception, in the sequence of ‘communications barriers’, which was perceived early on in the selection process, and dealt with as and when problems were identified.

The model does not, therefore, provide a prescription for selecting partners, but offers a framework for what and when certain aspects should be considered. By their nature, projects are unique, and a degree of discretion should be used in applying any general model to a particular project. In some cases, some factors will be more important than in other cases, and these may need to be considered at different times from those suggested by the model. Nevertheless, the model does present a general strategy to be followed.

Many joint ventures have been cancelled, even after years of negotiations and costly feasibility studies, be- cause of economic factors, changes in goals and so on. At any rate, it is better for the money spent on planning to be wasted, rather than greater losses being risked by such a venture being proceeded with.

The joint venture studied to test the selection model has been operational for several years. The detailed partner-selection process used by the companies in- volved is considered to have played an important role in ensuring continued cooperation between the two compa- nies. It is felt that such analysis overcame many problem areas early on, leading to smoother and more efficient operations. However, as with all ongoing partnerships, the future may reveal a different scenario which could have been avoided if it had been foreseen and considered during the selection process.

A changing business environment brought about by the single European market, the North American free- trade area and the opening of markets in the former Communist countries will encourage many companies to broaden their horizons into new countries and markets. In such environments, international joint ventures are likely to be a popular means of extending business activities while sharing risk and expertise.

Emphasis needs to be placed, by all companies, on detailed planning and discussion to reduce the risk of disastrous problems. A great deal of attention needs to be paid to partner selection for joint ventures by any

236 International Journal of Project Management

R G WILLIAMS AND M M LILLEY

company, as mistakes can be avoided. The process is highly demanding in terms of energy, time, persistence and diplomatic ability. However, it is hoped that its crucial importance is clear, and that those companies which make such planning efforts will also reap the benefits.

REFERENCES

1 Kiliing, J P Strategies for Joint Venture Success J P Killing (1983)

Rhys Williams is a lecturer in management science at the European Business Manage - ment School of the University of Wales, Swansea, UK, where he teaches project manage- ment. He graduated in struc- tural engineering from the Un~l~ersity of Wales, Cardty> and gained an MSc in man- agement science from Imperial College, London, UK, and a PhD from the University of Wales. His experience in- cludes a number of years in the co3~truction industry and !ocaf government. His main re- search interest is in mode&g and simulation applications in project munagement.

Harrigan, K R ‘Strategic alliances and partner asym- metries’ Manage. Znt. Rev. (1988) (special issue) Kogut, B ‘A study of the life cycle of joint ventures’ Munage. fnt. Rezq. (1988) (special issue) Berg, S V and Friedman, P ‘Corporate courtship and successful joint ventures’ Calif: Manage. Rev. Vol XXII (1980) Geringer, J M ‘Partner selection criteria for devel- oped country joint ventures’ Bus. Quart. (Summer 1988) Geringer, J M ‘Strategic determinants of partner selection criteria in international joint ventures’ J. int. Bus. Stud. Vol 22 No 1 (1991) ~~41-62

Melanie Lilley obtained a ist- class degree in European man - agement science from the European Business Manage - ment School of the Universit~~ of Wales, Swansea, UK. She studied business at the Univer - sity of Strasbourg, France, and continued her studies at Swansea, gaining an MPhil on the analysis of joint ventures in Western Europe. She is now based in Paris, France, as a marketing consultant with a particular interest in South East Asia.

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