Joint Ventures (JV) and strategic Alliances (SA) allow business organizations to enjoy some of the benefits of mergers, acquisitions and takeovers such as higher market share, but without having to lose their corporate identity.
Advantages of Joint Ventures (JV) and Strategic Alliances (SA)
Advantages of Joint Ventures (JV) and Strategic Alliances (SA) include:
1. Synergy. By pooling resources together such as know-how, experiences, technology, capital, skills, managerial acumen, etc., all members can benefit from each other’s expertise. Your business can take advantage of another business’s strength in an area where your business is weak and underperforming. For example, major customers in different countries, workers with unique skills or well-established distribution networks. While you can offer a complementary benefit to the other business. In this way, the partnership arrangement will be beneficial to all collaborating firms because together the businesses can each earn more than they could on their own. All businesses will fit together complementing each other when introducing new products more effectively than doing it alone.
Example 1: The Joint Venture (JV) between Lloyds Bank, a British retail and commercial bank with branches across England and Wales, and Sainsbury’s, the second largest chain of supermarkets in the UK, meant that both parties could specialize in their area of expertise yet gain access to new technologies and customers to achieve larger profits for both organizations.
2. Sharing costs and loses. The firms in the alliance share the costs of product development, operations and marketing, risks as well as profits or losses. It helps to reduce the financial burden on one single organization, if doing it all alone. Being able to share the cost of developing new products or entering into new markets is a major consideration for many businesses, especially during the times of high inflation when the costs are rising rapidly.
3. Spearing risks. Partners share both risks and rewards. Because Joint Ventures (JV) and Strategic Alliances (SA) can offer their customers diversified product portfolios, the risk of failure is also shared between the partners. There are also risks of failure because of compatibility problems and partners’ mistakes.
4. Easier entry into foreign markets. Joint Ventures (JV) are commonly used by companies around the world to enter foreign countries with relatively closed markets. The agreement is formed with local firms in those countries. International Joint Ventures (JV) and other forms of cross-border Strategic Alliances (SA) are very significant elements in the global expansion strategy of many multinational companies.
5. Relatively cheaper than integrations. Comparing with the cost of business integrations, Joint Ventures (JV) are relatively cheap. So, it is easier to pull it out than acquiring or taking over the whole another company. Partnerships make it possible for independent small businesses to participate in large projects.
6. Gaining strength against competitors. From a legal standpoint, though, the principal reason to form an alliance is to try to create an organization that is better able to compete in the market place. Companies participating through a friendly collaboration, are unlikely to directly compete with each other but benefit from their pooled resources to make them stronger as the whole. Economies of scale for cost reduction and brining different unique expertise are two enormous advantages.
7. Exploitation of local knowledge. Firms that expand via international Joint Ventures (JV) can take advantage of each other’s local knowledge and reputation. Market and product knowledge can be shared to the benefit of the businesses. Each business can benefit from the knowledge of the other and from sharing ideas.
8. Higher success rate. Because Joint Ventures (JV) and Strategic Alliances (SA) are friendly in nature, that kind of collaboration is more likely to lead to the success. Because all companies pool their funds and resources together, each of them will be involved in fulfilling shared responsibilities for mutual benefit.
Disadvantages of Joint Ventures (JV) and Strategic Alliances (SA)
Joint Ventures (JV) and Strategic Alliances (SA) also have many drawbacks:
1. Constant need of relying on partners. Partners in a Joint Venture (JV) and Strategic Alliance (SA) have to rely heavily on financial resources and non-financial resources of their counterparts. Any business failure of one of the partners may put the whole project at risk.
2. Dilution of the brands. Businesses around the world spend huge amounts of money on brand development. However, if the new product created by the venture or alliance is of worse quality, or does not live up to the brand promise of the original products offered by individual companies in the past, value will be lost. It is because the new product does not meet the expectations that current customers of individual companies have had of the brand. Some customers may be disappointed or confused, therefore will not make a purchase.
3. Culture clashes. This is not a new issue or something surprising. Cultural differences are a sort of occupational hazard. Whenever firms, the same as individual people, work together on a certain project, there is always the possibility of organizational culture clashes. It can lead to operational problems or even a complete failure of the project. As companies expand their business activities globally, they are constantly faced with cultural differences, especially among American, European and Asian managers.
4. Incompatibility of management styles. Styles of management and culture might be so different that the two teams do not blend well together. The businesses may have different business cultures or styles of leadership, making decision-making difficult. It will be especially visible during routine business activities such as business meetings, business presentations or during the production process.
5. Blame games. Potential mistakes might lead to one company blaming the other for costly errors. Projects associated with multiple parties who share certain management responsibilities require establishing shared understandings about the jobs to be done and risks resulting from lack of task completions.
6. Possible damages to brand reputation. Any mistakes made by one company in the alliance may damage the reputation of all the other firms, even if they were not the cause of the problem. If both partners are not deeply committed to the joint operations, it is unlikely to succeed.
The final investment decision whether to grow or not using Joint Ventures (JV) and Strategic Alliances (SA) shall be made after analyzing all the aspects. Managers should analyze the market situation, risk-taking capacity and taking legal advice as well as their business goals and assessing the risks involved.
