WHY JOINT VENTURES DIE?

General Motivations For Joint Ventures

Risk Sharing

Gaining Economies of Scale

Exchanging Technology

Exchanging abilities

Fundamental Conditions Pushing For Alliances

Motivation For Joint Ventures

Fear

Profit

Organizational Learning

Fear

Future Prices Guaranteeing Quality Guaranteeing Delivery

Profit

When companies join a joint venture, profit can be gained in two ways.

1. Oligopoly the market

2. Reduction of costs or Creation of new products

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,

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.

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.

Organization LearningJoint 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.

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.

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.

Rates of Termination of Joint Ventures

Causes of Termination of Joint Ventures

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.

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

Joint Ventures

Contract does not make a good readingEliminate 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

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 occurWhat is it worth for you?Sell it as a part of the capital contribution of your

firm to the venturePriceless, don’t share

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 getSharing brand label is often necessary, but

some loss of sleep can be expected

Do not burden the JV

Logical that partners will try to get something out of the venture

Suffer temptation to burden ventureExcessive channels of remuneration

○ Transfer prices on goods sold or bought from the venture

○ Employee salaries○ Licensing fees○ Royalty fees

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

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

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