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Advantages and Disadvantages of Joint Ventures

 

joint venture is an economic association between two or more companies. This is not a merger, as each company maintains its legal personality and administrative independence.

The agreement serves to ensure technological or commercial breath during a specific project. But like other business alliances, this business model has both advantages and disadvantages.

To clarify the subject, we have prepared an article on the key aspects of the Joint Venture model, as well as its advantages and disadvantages. Get ready to optimize your management knowledge!

It is up to the entrepreneur to define when and under what circumstances to adhere to the practice. When in doubt, the following lists may help.

What are the characteristics of a joint venture ?

The characteristics that define a joint venture are:

· There is a sharing of resources : the companies that are associated make their productive and human resources available to all.

· Each company maintains its own independence: each one works autonomously and maintains its brand and image.

· It can be of a corporate or contractual nature : from the union, a new company can be born or, on the contrary, the association is stipulated and marked by a simple contract.

· The contract stipulates the rights and obligations of each party : it is essential that the contract specifies those points that are the competence of each company and how the distribution of both the costs and the income that will be obtained is carried out. the Union.

· Own sectors that require large investments: in recent years many joint ventures related to the new technologies sector have been born. It is a competitive market, in constant innovation and in which companies need large amounts of money to continue.

Before establishing a Joint Venture, it is necessary to prepare a document defining:

  • Contributions from partners: it must be indicated if the contributions made have been in cash or in kind (machinery, patents, facilities …). It is also necessary to assess the cost of the services necessary for the start-up and subsequent operation of the activities (technical assistance, a supply of raw materials, after-sales service, etc.).
  • Organization: composition of administrative and management bodies, or what is the same, the way in which the necessary agreements for making important decisions will be taken.
  • Financial plan: necessary resources for initial investment and subsequent operation, sources of financing, the policy of distribution of benefits and policy on new investments.

Once the private agreement has been formalized, it must be submitted to a public deed, registering with the Commercial Registry of the country where the company is incorporated, generally the country of the local partner.

 

 Joint Venture Pros and Cons
Weaknesses  Effort in the selection of the partner
 Difficult legal setting
 Investment need
 Difficulty in valuing the assets contributed
Threats  Risk of conflict of interests
 Dependence of the partner for important decisions
 Transfer pricing
Strengths  Complementarity of tasks
 Knowledge of the local partner market
 Share risks and investments
 Presence in the market
 Local and international image, simultaneously
Opportunities  Flexibility in contributions
 Acceptance by local authorities
 Take advantage of support programs
 Take advantage of preferential financing

 

 

How Does the Joint Venture Business Model Work?

The term joint venture is, in fact, a strategic model in which two companies come together to exploit market opportunities.

This allows the parties to end up reaping the benefits of the commercial agreement since each one can offer the expertise it possesses in its field of activity. In this way, the final product reaches higher quality – with a smaller individual investment of the companies involved.

Imagine a hypothetical situation of two companies: one works in the electronics business, while another has dominance of the digital gaming market. Certainly, the union of these parts could result in an excellent product and able to add value to investments.

This structure is not so intangible. The previous example actually happened in the 90’s, with the partnership between Nintendo, game giant and Gradiente, producer of electronics. The result was the release of several famous video games, such as Super NES, Nintendo64 and Game Cube – famous to this day.

What are the major advantages of this structure?

Being part of a Joint Venture has its advantages and disadvantages. When companies are successful in the strategy, all participants share the profit as previously agreed in the contract.

In this same line of reasoning, failure in Joint Venture results in all participating companies receiving a portion of the losses during the process.

By having attractive and unique benefits, it becomes a very attractive option for some. So we have separated some of the main advantages of Joint Venture:

1. Division of responsibilities

One of the great advantages of the Joint Venture is that this method allows dividing the shared risk among the participating companies. It is natural that the creation and development of a new product or service create great risks for companies. That’s why most businesses cannot manage these risks alone.

However, with the Joint Venture, each company contributes a portion of the resources needed to develop the product or service and expose it to the market, making it easier for financial difficulties, market research, and product development to be less challenging.

As a result, the risk of a project failing and having undesirable impacts on the company’s financial health is considerably lower because the project costs are distributed to each of the participants.

2. Lower Initial Investment

What attracts the most attention from companies when it comes to worshiping this operation is low investment and cost reduction. With this model, it is possible to have more competitiveness, in addition to increasing brand recognition for new consumers.

As we said before, the costs of producing the product or service are divided among all partners of the operation. In this way, the initial investment tends to be well below the other types of operation, making the Joint Venture an option for those seeking low initial investment opportunities.

3. Optimized operational capacity

In addition to all the above benefits, the Joint Venture allows sharing of advanced technologies and cutting-edge machinery. With resource sharing, the production line becomes more efficient. This ensures that the end product is of high quality and meets the expectations and needs of the market.

4.Cheaper production

With the production costs distributed among different partners, the investment in this operation tends to decrease. Thus, the company can reduce the expenses or, therefore, increase the supply of the product, offering it at a cheaper price to the final consumer.

 The same objective is shared: the risk of abandonment by some company is reduced by the fact that it is an association that, in the medium and long-term, benefits them both.

5. Market Expansion

If the agreement involves distribution and logistics, a small or medium-sized industry, for example, can sell in regions previously unthinkable. This is possible because the organization will not have to pay freight, sellers, and other goods brokers alone.

6.Access to new technologies

Investment in partnership allows you to purchase more modern equipment. A joint venture allows the acquisition of cutting-edge machinery. The likely consequences are a more efficient assembly line, process sustainability and a higher end product. Alone, many entrepreneurs can not afford to renovate their equipment.

7.Healthy competition

Although a joint venture does not necessarily have to happen with companies in the same industry, it is common for direct competitors to join. Although there is competition for a single market, the other advantages guarantee profit for all participants.

On the other hand, losses may also occur. But as they are also shared, the financial crash does not weigh so much.

8. Facilitates entry to new markets

For example, there may be partnerships between companies from different countries that facilitate both entering their respective markets. By operating in complementary sectors, they are not direct competition.

9. Information is obtained about the public of the new market

Each company is perfectly aware of the market where it operates. For the joint venture to be successful, such information must flow and, therefore, both are transmitted knowledge.

10. The difficulties to obtain financing are reduced

Each company separately would have more complicated access to a credit or loan than the two together, since it gives an image of greater solvency and there is a distribution of the risks.

What are the disadvantages of a joint venture?

Even with the innumerable possibilities that the Joint Venture strategy offers for prepared managers, it is important to pay attention to the negative points that may arise in this commercial agreement.

In order to elucidate this question, we have listed the main disadvantages of adopting this practice. We emphasize that any commercial agreement must be evaluated and formalized, mitigating as much as possible any kind of disagreement between the parties. Look:

1. Greater risks

Since there are two joint ventures for a project, there may be failures due to operational issues or even mismanagement of the resources involved. This creates a serious investment risk.

In this way, it is essential that all steps are followed and the results are collected. To avoid deviations in this practice, a good tip is to seek the support of a professional consultant to develop methodologies during the relationship of the Joint Venture.

2. Low autonomy

Not that this is really a worrying disadvantage, but the autonomy of investment becomes a joint decision. In some ways, this can be a limiter for managers. However, when there is a good relationship with the partner, decisions can be made in a practical way and without bureaucracy.

Ideally, all project agreements and meetings should be effectively formalized in signed minutes or documentation. Thus, the parties can respect the autonomy of the relationship and focus on what matters:

  • quality;
  • customer satisfaction ;
  • financial results.

3. Unreliable partners

Perhaps one of the main problems when adopting the Joint Venture model is closing deals with a partner that is not reliable. Without a doubt, this contract would cause immeasurable harm to all.

Therefore, it is necessary to seek indications, evaluate the equity involved and find the solution that best fits the profile of the company and the consumers. By adopting safe practices, these drawbacks can be quickly eliminated from the investment.

In any case, investing in a joint venture is a great challenge, but it offers a number of benefits to those who are well prepared for the market’s competitiveness.

4. Rigorous decisions

The alliance between different organizations means more heads thinking about the direction of the business. Such a scenario may limit innovation in strategies and in the very structure of operations. Example: While some are worried about not getting debt, others can glimpse financing and lines of credit.More heads making decisions can be tricky.

5. Goals in disarray

The organizational culture varies from company to company. Distinct approaches to the same problem often lead to friction and wear out the relationship. Therefore, the parties must be in tune and understand very well what is the role of each in the joint venture.

6. Unequal responsibilities

Activity control is shared, but the execution does not always remain in balance. One case is when company A enters with personnel and company B, with technology. The situation creates a disparity of time, money and other resources allocated, which can be interpreted as unfavorable for one side.

Another delicate scenario is when the joint venture incurs debt. By contrast, they are usually the responsibility of everyone involved, even if only one of the companies has contracted the debt.

7. Possible conflicts of interest

During the relationship, issues may arise that were not initially foreseen and that may influence the decision-making process. Keep in mind that, to make important decisions, the two companies must agree. This may cause delays with respect to the planned plans.

 8. Assessment of the contributions of each party

One company may believe that it is contributing more than the other so that it will want to receive a higher percentage. Hence, it is so important to make clear all aspects of the contract.

 

Even presenting a formidable context for expanding companies, achieving a level of excellence in the business world has always been a great challenge for managers and entrepreneurs.

Therefore, seeking smart strategies is the best way to ensure prominence and good results for the company. That’s where a world-renowned model emerges and has gained glimpses in recent years. We are talking about the Joint Venture.

 

 

 

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