Building Successful Joint Ventures

“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

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

The Real Reason

Mistakes done at the Launch Phase!!Companies fail to commit sufficient resources

during the launch phaseLack 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”

Joint Venture Challenges

Building and maintaining a strategic alignment between partners

Creating a joint governance systemManaging the economic interdependencies

between the parent firm and the joint ventureBuilding the organization of the JV

Putting together a good management team Deciding on all potential issues prior to

operational launch

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

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

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

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 managersUnder-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!!

Clearing the Hurdles

Strategy Governance Economics Organization

Challenges Different Strategic Interests & goals

Sharing of JV control complicates governance

Parent firms have different reporting systems & metrics

Parent firms to provide resources, size, timing issues have to be decided

JV performance is hidden/isolated from parent firm

Managing cultural differences

Career path conflicts for members of JV

Keys to Success

Align goals of JV with that of the parent

Agree on short term goals for the JV first

Have a clear cut rules for joint governance

Apply loose-tight management style

Specify the nature, timing, quantity of resources to be provided

Establish a common risk and performance management policies for JV

Create a compelling value proposition for JV employees

Get key staff from parent firm to work for the JV

VC style Business Plan

Every JV needs a business planThe 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”

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 partnerCoordination JV

Value comes from Leveraging the complementary Capabilities

New Business JV Value comes from creating new growth by

combining existing business Capabilities

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

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

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

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

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

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”