Successful Joint Ventures

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  • 1. Building Successful Joint Ventures
  • 2.
    • “ Joint Ventures and Alliances can deliver more shareholder value than M&A can, but getting them off the ground can trip you up in unpredictable ways”
    • -- Harvard Business Review
  • 3. History of Joint Ventures
    • A study published in Harvard Business Review in 2002 reveled that a whopping 47% of joint ventures fail!!
    • Reason cited are:
      • Wrong Strategies
      • Incompatible Partners
      • Weak Management
      • Unrealistic or inequitable Deals
  • 4. The Real Reason
    • Mistakes done at the Launch Phase!!
    • Companies fail to commit sufficient resources during the launch phase
    • Lack of attention during the Launch Phase
      • Strategic Conflicts between partners
      • Governance gridlocks
      • Missed operational Synergies
    • “ Launch Phase : between signing memorandum of understanding to first 100 days of operation”
  • 5. Joint Venture Challenges
    • Building and maintaining a strategic alignment between partners
    • Creating a joint governance system
    • Managing the economic interdependencies between the parent firm and the joint venture
    • Building the organization of the JV
      • Putting together a good management team
      • Deciding on all potential issues prior to operational launch
  • 6. Strategic Alignment
    • Each firm will have its own goals, market pressures, share holder’s expectations etc.
    • These issues must be analyzed and discussed in detail before the launch of JV
      • Which Market Segment?
      • Cash Flow Management – Reinvest or Pay Dividends?
    • The Goals for the JV must then be set such that it is in line with the goals, expectations of the parent Companies
      • E.g : Apple-Motorola-IBM PowerPC venture
      • Verizon-Vodafone venture to Create Verizon Wireless
  • 7. Joint Governance System
    • Challenge is to establish a governance system that promotes shared decision making and joint oversight, without stifling entrepreneurship
    • Weak Controls can expose the parent companies to lots of Risks and cost money
      • Pepsi & BAE S.A in Brazil. Mistakes in JV management led to huge losses for Pepsi
    • Protect important intellectual assets of the parent in the venture
  • 8. Economic Interdependencies
    • Parent Companies often agree for a broad outline on the extent of economic interdependence during Negotiations
    • But fail to quantify actual resources that needs to flow from each of the partner to the JV
    • Managing & building an economic interdependence between Partners is very important
    • Avoid duplicating costs. Parent firms usually provide capital, Human Resources, Intellectual resources etc
      • Pepsi & Starbucks : Ready to drink Coffee
      • Starbucks provides the concentrate, Pepsi provides distribution network, Both jointly handle marketing
  • 9. Building the Organization
    • Building the JV into a successful high performing alliance needs capable managers
    • Often best managers at the parent company are reluctant to work at the JV or want to return to parent firm after sometime
    • JV often gets part time managers
    • Under-investing in a JV is a sure fire formula for failure
      • Eg: Corning and Mesa in Mexico
    • Get the Best team in Place for the JV!!
  • 10. Clearing the Hurdles Create a compelling value proposition for JV employees Get key staff from parent firm to work for the JV Specify the nature, timing, quantity of resources to be provided Establish a common risk and performance management policies for JV Have a clear cut rules for joint governance Apply loose-tight management style Align goals of JV with that of the parent Agree on short term goals for the JV first Keys to Success Managing cultural differences Career path conflicts for members of JV Parent firms to provide resources, size, timing issues have to be decided JV performance is hidden/isolated from parent firm Sharing of JV control complicates governance Parent firms have different reporting systems & metrics Different Strategic Interests & goals Challenges Organization Economics Governance Strategy
  • 11. VC style Business Plan
    • Every JV needs a business plan
    • The business plan must meet the same standards of rigor, detail, and logic that a venture capitalist would demand
    • Top management of the parent firms should meet to develop and approve the business plan
    • Define exactly how & where the JV will compete, set financial targets, plan expenditures and develop organizational structure
    • Remember “The Devil is in the Details”
  • 12. Types of Joint Ventures
    • Consolidation Joint Venture
      • Value comes from combining existing businesses
    • Skills Transfer JV
      • Value comes from transfer of some critical skills to other partner
    • Coordination JV
      • Value comes from Leveraging the complementary Capabilities
    • New Business JV
      • Value comes from creating new growth by combining existing business Capabilities
  • 13. Why a Joint Venture?
    • When advantages are not clear, new opportunities have an unknown potential
    • When a firm has internal capability to manage a JV but does not have all the resources to exploit the new opportunities
    • When new opportunities need different core competencies than that of the parent
    • When M&A is not a good option
      • M&A carries a 20%-50% premium
      • Partners are not willing for M&A
      • Firm is not capable of M&A
  • 14. Running the Venture
    • Successful JV pay a lot of attention to communication – Before launch & throughout the life of the venture
    • Management teams of JV act quickly to manage inevitable setbacks
    • Hire the right kind of management team
      • CEO for a JV interviews with all the members of the JV board to understand the objectives and set short term targets
    • Avoid Influencing JV management to make decisions in favor of one parent
  • 15. Running the Venture
    • Establish an effective governance system for the JV during the launch phase
      • Allows JV Management team to make timely decisions
      • Provide parent organizations with sufficient oversight
    • Establish rigorous risk management and performance tracking methodology
      • Parent firms must be aware of any debts at the JV
      • JV’s ROI must be tracked and measured
      • Sarbanes-Oxley Act makes JV management of risks & performance transparency mandatory
      • Audit process on par with that of the parent firms
  • 16. Managing Interdependence
    • JVs need interdependencies between parent firms to survive
      • Healthy level of interdependencies
      • Mutual trust and respect
      • Agreement on transfer pricing, protection of IP, access rights to technology etc are required
      • Agreement on sharing of parent services with JV
    • JV must be linked with the corporate review & planning cycle of the parent
  • 17. Staffing the JV
    • Entice the best talent from the parent firms to join. JV launch teams must identify key human resources needed for it to succeed
    • Motivate people who work for the parent and contribute for the JV
      • A formal job commitment to JV
      • Bonus for JV’s success
    • Remember, it the people who make a firm succeed
  • 18. Closing remarks
    • Launching and running a world class JV is complex and demanding task. If done right, JV promises a better ROI than a merger or acquisition.
    • It is necessary for all executives involved to understand the unique demands of JV and invest in early planning
    • Right Investments during launch phase will reap big rewards
    • “ If you get the launch right, the rest will take care of itself”